The Digital Gap and Inequality

Rising inequality is a major challenge facing the world currently. Digital connectivity has the potential to either reduce inequality or perpetuate inequality if not accompanied by rising digital skills. Access to the internet is rising globally. Yet this does not automatically solve the digital gap. Improving digital literacy is an essential step in helping people globally understand the resources that they have available at their fingertips – often for free.

This paper will explore connectivity, digital literacy and the rising prominence of digital skills within the global workplace. The pandemic hastened the digital transition and highlighted the challenges to the future of work resulting from the widespread adoption of technology. All sectors of the global economy will likely experience digital transformations, some more than others, and digital literacy is becoming critical to navigate the digital economy.

Digital Connectivity – Infrastructure of the Future

Roads, rail, ports and pipelines were previously the infrastructure that determined access to different markets. While these remain critical for transporting physical goods, information and knowledge are key commodities of the modern world. In the age of the internet and cloud computing, digital connectivity is the modern equivalent to access to the global hub of commerce. It opens a world of possibilities.

Connectivity is the first step in gaining the digital skills required to maximize these opportunities. While more than half the global population uses the internet, access varies by region and gender. In 2019, 55% of men were using the internet while only 48% of women did so. This discrepancy between male and female internet access is predominantly driven by developing and least developed regions, where digital connectivity is scarce. Only 44% of the population in the developing world and 20% of the population in the least developed world currently have internet access, contrasting with over 85% in developed regions.1

In the US, most of the population used the internet in 2019, although only 73% had broadband access at home. There are a few key areas in the US where fast, reliable connectivity is lacking; rural regions, lower income and lower education households as well as the elderly. Only two-third of rural Americans had home broadband access in 2019. More than 90% of college graduates have broadband access compared with only 46% of those with less than a high school qualification. Similar patterns are evident when comparing internet and broadband access across income levels. While education and income reflected a sliding scale in access, age is unique with there being a clear distinction between working age and retirement. In 2019, US home broadband access for those older than 65 was only 59% compared with in excess of 77% for all other age groups. While older generations typically adapt slower to new technologies, over the last few years internet access and home broadband has been rising the fastest within the above 65 demographic.The COVID-19 pandemic has driven even greater adoption within older generations due to the social inclusion provided by digital connectivity as well as e-commerce providing a safe way to shop.

Improving digital access for all Americans was a key component of President Biden’s infrastructure plan during his election campaign. Biden’s original plan involves investing US$20 billion into improved broadband access in rural regions. Additionally, Biden intends to work with Congress to pass the Digital Equity Act to help reduce the digital divide between communities.3

Similar digital inequalities exist in other developed countries. Improving broad digital access will help improve digital equality globally. But connectivity is just the first step. It goes hand-in-hand with the need to improve digital literacy.

From Connectivity to Functionality – The Importance of Digital Literacy

The pandemic is likely to have driven further internet adoption in 2020. Rising digitisation globally increases the importance of digital access. Historically, new technology has created new jobs requiring new skills and eliminated jobs that had become obsolete or automatised. The rapid adoption of technology by companies implies that most students will occupy jobs over the next decades that do not exist today, while almost half of the current jobs are at risk of being automatedand half of workers believe their work is going to change in the next decades.5 Microsoft has estimated that over the next five years around 149 million new digital jobs will be created worldwide, mostly in relation to software development, data analysis, and cybersecurity.6 However, it takes time and training to acquire the digital skillset required to move to the new productive sectors of the economy.

The widening skill mismatch risks leaving a whole swathe of society behind, potentially leading to more inequalities and social unrest. According to the Boston Consulting Group (BCG), within developed countries the skills mismatch affects two out of five employees or approximately 1.3 billion people globally. The widening skills gap around the world is primarily attributable to automation, the rise of online-based business models, and the secular decline in investment into employee training over the past two decades. There are economic costs associated with the skills mismatch for companies which need to retrain underqualified employees, and for governments that see rising structural unemployment and lower economic growth. There is a strong negative relationship between the skill mismatch and labour productivity growth (Figure 1).7 OECD countries have been experiencing a secular decline in labour productivity over the past decade which coincides with the rise of skills mismatch.

The skill mismatch is likely to affect more women than men in the coming years considering a significant gender gap in Science, technology, engineering and mathematics (STEM) education. These high education degrees typically lead to occupations that are expected to have strong growth over the next decade. Male students are the overwhelming majority of STEM students. In the US, women account for only a third of Master students in Computer and Information Sciences and less than a quarter of PhD students in this field. This feeds through into the workplace and contributes to an environment that is male-dominated and potentially contributes to women leaving the field at a greater rate than men. In the US, 80% of the jobs in software development, applications and system software are filled by men (Figure 2).8 Women accounted for less than a third of those employed in scientific research and development (R&D) across the world in 2016.9

Digital Literacy a Global Need 

Beyond the lack of digital infrastructure, closing the digital gap will be particularly challenging in regions of the world with high illiteracy. In emerging markets, mass education will therefore be key to build a digital skillset among the large youth population. However, digital inequalities also exist in regions where the technology is widely available. Only a small share of the population is digitally literate as suggested by the growing skill mismatch across OECD countries. In developed economies, the digital divide is noticeable between the younger digital native population entering the workforce, namely generation Z and Millennials, and older populations which represents the bulk of the current workforce.

The lack of digital literacy prevents most of the population from leveraging the full potential of the digital infrastructure. Without honing ones digital skills, employability is reduced. About 41% of job seekers find jobs through online platforms and 14% through social networks, according to the BCG.10 Lessening the negative impacts of the digital transition on the workforce will require a coordinated action between stakeholders across the public and private sectors.

Facing a growing talent mismatch, an increasing number of firms are launching upskilling initiatives to improve the level of proficiency in digital literacy skills of their current employees. For example, Microsoft launched a global initiative to help 25 million people who were impacted by COVID-19 acquire the digital skills to either find a job or be promoted.11 There is an economic incentive for employers to train their employees. According to PWC estimates, replacing workers cost six times the cost of upskilling.12

Reskilling initiatives also improve the brand image with regards to social responsibility. This resonates well with investors’ inclination towards sustainable investing, amid the rise of ESG investments. Digital Literacy, which focuses on “relevant skills, including technical and vocational skills, for employment, decent jobs and entrepreneurship” among youth and adults, is one of the indicators encompassed in the UN Sustainable Development Goals (SDG) which serves as a reference to ESG frameworks.13

Opportunities Created by Digitisation 

The rate of change is accelerating. How individuals and countries embrace digitisation is likely to have a significant impact on their future potential. While change brings disruption, it also presents opportunities. Younger demographics typically adapt faster to technological change. As such, while population aging increases the need for certain technology, it has the potential to reduce the rate that new technologies are adopted in certain key developed markets. This has the potential to create a unique opportunity for developing regions who have prioritised digital connectivity and have young, digitally savvy populations.

India is currently the second fastest digitising economy and is increasingly being recognised as a global force. While digitisation was being prioritised prior to the pandemic, COVID-19 lockdowns helped India accelerate its digital transformation.14 Digital India is a flagship government program that was implemented in mid-2015 and is intended to transform India into a digitally empowered society and a knowledge economy. Their Digital Identity project also helped to improve financial inclusion while facilitating direct transfers of government benefits. These digitally-enabled policies have contributed to significant improvement in India’s ease of doing business ranking. In 2015, India ranked 142nd while in 2019 it had improved to 77th.15 These policies have also helped to narrow the digital gap and improve access in remote regions of the country.  India is also investing in emerging technologies such as Artificial Intelligence (AI), quantum computing and machine learning to help in their digital transformation.16

Investment in digital infrastructure and knowledge positions India in an advantageous position relative to other developing economies who may have prioritised other areas. Recent technological advancements in robotics and automation are making it possible to bring production back to developed countries. While robotic costs are declining, labor costs in developing economies have risen. This may in time provide a cost incentive to reshore and automate. Following the disruption caused by the trade conflict and COVID-19 supply chain glitches, many companies are reassessing their global supply chains.17 Additionally, the rising focus on ESG factors has an impact on supply chains due to ESG prioritising longer-term risk management and the ethical treatment of both suppliers and customers. This is increasing the scrutiny on the environmental impact of supply chain decisions and is driving an increased focus on re-shoring production to more environmentally-aware countries.18

Countries that provide low-skilled labour are at risk of becoming redundant within the global economy. Conversely, the opportunities are endless for populations with the required digital skills. Cloud computing creates the opportunity to outsource higher-skilled employment to more affordable markets. According to the World Bank, increasing internet penetration in developing countries from around 35% to 75% has the potential to add US$2 trillion to their collective GDP. Equally important, is the potential to create more than 140 million jobs globally. Online outsourcing has the potential to be a major growth area over the coming years. Additionally, digital access opens the potential for job creation in engineering, information and communication technology as well as other high skill areas.19

Conclusion

Digital access and skills are becoming critical for global competitiveness in the emerging digital world. The first step in this direction is connectivity. Thereafter, it is ensuring that people understand how to get the most from the resources available to them in order to upskill for a future that is increasingly digital. Education of the future is likely to be different as it will need to prepare students for a digital future in which change is the expectation.

While lack of digital access may perpetuate inequality in certain regions, digital is also democratising access to knowledge. As such, with access and foundational digital skills, digital opens a world of possibilities. Due to younger populations typically adapting to technological changes quicker, this could assist emerging economies who have embraced the change and prioritised digital access and skills. As the global economy transitions to a digital economy, new economic leaders might emerge from faster digitisation.

 

 

This document is not intended to be, and does not constitute, investment research as defined by the Financial Conduct Authority