Monday, November 24, 2014

Technology and the Employment Challenge

MILAN – New technologies of various kinds, together with globalization, are powerfully affecting the range of employment options for individuals in advanced and developing countries alike – and at various levels of education. Technological innovations are not only reducing the number of routine jobs, but also causing changes in global supply chains and networks that result in the relocation of routine jobs – and, increasingly, non-routine jobs at multiple skill levels – in the tradable sector of many economies.

How, then, should policymakers confront the new and difficult challenges for employment (and, in turn, for the distribution of income and wealth), especially in developed economies? From recent research, we have learned a number of interesting things about how the evolution of economic structure affects employment.

The tradable side of advanced economies has not generated any real net increases in employment for at least two decades, while the jobs that it has created are concentrated in the upper-income and upper-education ranges, with employment declining in the middle and lower range of income and education. Growth in high-end services employment is matched by contraction in high-employment components of manufacturing supply chains.

Until the crisis of 2008, middle- and lower-income job growth occurred entirely in the non-tradable sector of the economy, which accounts for roughly two-thirds of advanced countries’ output and employment. Here, incomes and value added per employee remained largely flat. Jobs could be eliminated by technology, but not by global competition; and, unsustainable, debt-fueled domestic-demand growth helped to delay the current employment deficits.

As a result, the advanced economies have been shedding routine jobs at a rapid rate, while adding non-routine jobs (for example, those that cannot yet be replaced or reduced by machines and networked computers). This has fueled a dramatic rise in the return on education and high-level skills, with the share of total income received by owners of capital and high-end employees increasing in advanced countries for more than two decades.

Growth and employment are thus diverging in advanced countries. The key force driving this trend – technology – is playing multiple roles. The replacement of routine manual jobs by machines and robots is a powerful, continuing, and perhaps accelerating trend in manufacturing and logistics, while networks of computers are replacing routine white-collar jobs in information processing.

Part of this is pure automation. Another important part is disintermediation – the elimination of intermediaries in banking, online retail, and a host of government services, to name just a few affected areas.

But technology’s impact does not stop there. The same class of information technologies that automate, disintermediate, and reduce the costs of remoteness are also enabling the construction of increasingly complex and geographically diverse global supply chains and networks.

Global supply chains – constantly in flux, owing to rising developing-country incomes and shifting comparative advantage – locate productive activities where human and other resources make those activities competitive. Links in these chains include not only intermediate products and assembly, but also a growing range of services – research and development, design, maintenance and support, customer service, business processes, and more – as transaction, coordination, and communication costs fall.

The result is what is sometimes called the “atomization” of global supply chains: increasingly fine subdivisions are feasible, more efficient, and locatable almost anywhere. Proximity still matters in terms of transport and logistics costs. But, with the developing world accounting for the largest new markets and most of the growth in global demand, the logic driving atomization should become even more compelling.

The efficient ongoing decomposition of global supply chains, networks, and services has two related consequences. First, the tradable part of the global economy – where competition for economic activity and jobs is direct – is becoming a larger share of the whole; the same is true of individual economies. Second, parts of global supply chains that were not competitive are no longer protected by being adjacent to parts that were. Adjacency is no longer a requirement.

These dynamics and related challenges are not confined to advanced countries. Over the next decade, for example, China will replace much of its labor-intensive assembly employment with higher-value-added employment in manufacturing and services, not only in the tradable sector, but also – even more noticeably – in the rapidly growing non-tradable part of its economy. The expanding scope and diminishing costs of automation and additive manufacturing may affect labor-intensive functions globally, including in earlier-stage developing countries.

A key factor in adapting to these forces is investment. For individuals, businesses, educational institutions, and governments in advanced countries, broad-based, elevated, and efficient investment in education and skills is critical. Closing wide information gaps in the market for skills would also increase the efficiency of these investments.

Across-the-board upgrading of human capital will improve income distribution both directly and indirectly (by reducing the supply of lower-skill workers relative to demand). It will also (partly) mitigate the concentration of wealth that results from a highly skewed income distribution.

On the tradable side, competitiveness depends not only on human capital, but also on a host of other factors: infrastructure, tax systems, regulatory efficiency, policy-induced uncertainty, and energy and health-care costs.

There is no guarantee that taking the right steps in these areas would entirely overcome the employment challenges that individuals and countries face, though doing so would help. In fact, it is possible that we are entering a period in which major adaptations in employment models, work weeks, contract labor, minimum wages, and the delivery of essential public services will be needed in order to maintain social cohesion and uphold the core values of equity and intergenerational mobility.

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    1. CommentedLuke Lea

      I hope Prof. Spence will get a little further out front on the need for new statutory limits on the length of the work day to compensate for the fall in the demand for labor due to automation and new labor-saving technologies.

      The eight-hour day and five-day work week were a successful response to similar technological advances a century ago.

    2. CommentedFrederic Mari

      I've actually written on the same subject - I'll be bold and post the link here:

      but, basically, I think Mr. Spence is particularly right when he says: "In fact, it is possible that we are entering a period in which major adaptations in employment models, work weeks, contract labor, minimum wages, and the delivery of essential public services will be needed in order to maintain social cohesion"

    3. CommentedAndré Rebentisch

      Prica facie assumption for trade would be that a labor-intense nation becomes more labour-intense, a capital-intense nation more capital-intense.

    4. CommentedJ St. Clair

      there will always be people behind the curve......the key question is if there is going to be permanent losses of jobs...everyone needs to be devising a plan for the non-employed...the non-employed remain breathing and still need a place to live, etc. ALL without every having money

    5. CommentedJose Domingues Costa

      Good article. In my view, the unemployment in the more developed world is bound to keep increasing due to three major reasons:
      - Since WWII there hasn't been any war that decimated the population, crating labour shortages, or the stock of physical capital so as to require major reconstruction;
      - The improvements in automation technologies first felt in agriculture, and then in manufacturing are now going to reduce the total need for labour in the service sector 8which accounts for most of the employment);
      - The cost reduction in transport, communication and information sharing is eliminating a major "frictional cost" that required that many goods and services had to be produced close to where they were provided, therefore more and more types of goods and services can be outsourced to where costs (and in some respects, standards) are lower;

      I think the job problem can only be overcome by the development of a wellbeing economy, one where a big chunk of the work is caring for and entertaining other people. This would mean more nurses for older people, more coaches/referees in sports, more music/dance/culinary teachers, more designers of gardeners, interiors etc etc etc

      To open the way for such economy, there are two major requisites: more free time - down with the 40, 50 and 60 hour workweeks - and more sharing of the wealth produced, so these services are affordable by most of the population.

    6. CommentedAbhishek Singh

      Geographical adjacency may no longer be a requirement, ideological adjacency remains a vital requirement.

    7. CommentedProcyon Mukherjee

      I find it particularly interesting that the same genre of people from the community of thinkers, economists, et al, congratulate the progress of technology that leads companies to improve productivity and make inroads into new products and services that were not possible before, while ignoring the disruptive impact it could have on net job growth; good to see that in Michael Spence’s article we have both sides of the story. The incentives that society provides for economic growth to happen, also includes the same for job growth, but the correlation is not uniformly visible. For Japan, where job growth has stopped virtually now, we see a strong correlation with the equity markets, but in U.S. for example we have seen a relatively weak one. The import of manufacturing jobs in U.S. which is so very acute, while the export of the same from Japan, are two sides of the extreme; perhaps we could have had a more balanced approach through a mediation process that allowed the right incentives through tariffs, may be two decades back.

    8. CommentedLuke Ho-Hyung Lee

      I would suggest you see this article for a solution:

    9. CommentedDennis Argall

      A significant element of the non-tradable in developed places (for this purpose, places - including some parts of rapidly developing countries - without extended family traditional support systems) is provision of community care for aged or disabled and housing and other services for disadvantaged. This becomes the major growth industry, major source of new employment in some areas of industrial decline and/or ageing population, but curiously statistical systems are resistant to inclusion of such industry in 'industry development' and the sector gets excluded from 'industry' discussion, leaving it fatally in the path of the hooting trains of politics and the supertankers of central bureaucracies.

      Disintermediation is a factor impacting on community services as powerful bureaucracies firstly express preferences for minimising interaction with larger numbers of service provider organisation and secondly impose centralised call-centre culture on crisis as well as other services, to the obliteration of local skills and knowledge in many places. (parenthesical detail: consider the mental health crisis worker attending to the voice of the known local client on phone saying "I've got a knife" compared with the same worker making copious notes on a computer for a far away call centre worker to hear the same "I've got a knife" without knowing the modulations of that voice, the home circumstance of that voice, etc, while trying to read unfamiliar case notes.)

      Centrist bureaucratic pressure is contrary to the wisdom of 'atomisation' of services. It ought to be self-evident that efficiencies will arise with increased skills in local workforces in the community sector and in local management (rather than wage suppression and centralised management), and in the incorporation of 'implicit knowledge' (understanding the local and the client) into the process.

      I think Michael Spence's propositions are very relevant in this sector, would like to see more discussion from economists of the sector in such terms. How to do that without ideological and political bias is a big question. A first step is to see the sector as an industry and part of the economy of considerable importance to quality of life, especially in countries and circumstance of decline or absence of traditional social support systems.