Thursday, March 23, 2017
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There may be some losers as well as winners, but the American public as a whole will be better off. And those who lose their jobs to the new technology will soon find other employment.

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How Scary is Disruptive Technology?

CAMBRIDGE – The steady stream of improvements in driverless cars has convinced me that before too long the roads will be filled with cars and trucks operating without humans at the wheel. Likewise, I am convinced that the revolution in artificial intelligence will allow computers and robots to do many of the tasks that white-collar workers now do.

It’s not surprising, therefore, that many people are worried about the fate of those whose jobs are vulnerable – or have already been lost – to the latest disruptive technology. What will happen to the millions of men and women who now drive trucks and taxis when the trucks and taxis can drive themselves? What will happen to the accountants and health workers when computers can do their jobs?

Some analysts have estimated that, with many fewer employees needed to produce the current volume of goods and services, a large share of current employment could be made redundant.

I hear these worries and realize that they cannot be easily dismissed. But I am optimistic that the United States, at least, will adapt successfully to the new technology. There may be some losers as well as winners, but the American public as a whole will be better off. And those who lose their jobs to the new technology will soon find other employment.

I believe that there is little reason to worry that the new technology will create large-scale unemployment. The changes in technology will increase the economy’s output and raise the potential standard of living of the population. Those who want to work will continue to find jobs.

Why am I so optimistic? Simply put: history. Rapid technical change is not something new. We have experienced technological change that substitutes machines and computers for individual workers for many years. And yet, despite the ups and downs of the business cycle, the US economy continues to return to full employment.

This has been most dramatic in manufacturing. Robots and automated machines have replaced production workers in manufacturing for many years, driving employment in the sector from 13 million in 1950 to only nine million now, even as the real value of manufacturing output rose by 75%. And those who are no longer employed in manufacturing have found jobs elsewhere in the economy.

Computers have also replaced workers in a wide range of service industries. We no longer see many elevator operators. Switchboard operators are gone. Most of us get our boarding passes at airports from automated check-in machines. Law firms and accounting firms use computers to do what professional employees used to do.

And yet the US unemployment rate is now just 4.9%, even lower than its average in recent decades. Among US college graduates – who constitute 40% of the US labor force – the unemployment rate is just 2.7%. Because college graduates comprise a larger share of the younger age cohorts than of the older population, the overall unemployment rate will be held down as that group ages and its share of the labor force grows.

The rising output per worker made possible by the increased use of robots and computers also will allow employees to work fewer hours and enjoy more leisure. Employees in the US currently work an average of 1,790 hours a year, 30% more than their German counterparts, who average just 1,371 hours per year.

A reduction in working hours per employee translates into quality-of-life improvements like longer vacations and longer weekends. Fewer working hours will also provide more opportunities for travel, eating out, and other activities that create jobs for service workers. The aging of the population will increase the need for service-sector employees in hospitals and nursing homes as well.

These trends will fuel higher demand for workers in the service sector, which now accounts for 81% of employment in the US. The share of workers in the US service sector increases year after year; it is where those who lose jobs in manufacturing or construction find new ones.

And computers and robots simply cannot replace many of these jobs. Although they can provide some of the services that older people will increasingly need, for example, they cannot provide the services that involve actually touching clients and patients. People choosing careers will bear such considerations in mind as they select occupations. That, too, will hold down the unemployment rate in the future.

The US unemployment rate currently is less than half the rate in the European Union. There are many reasons for the disparity; but a critical one is the absence in the US of labor laws and union rules that prevent employees and firms from adapting to the new technologies. If the US maintains a relatively free labor market, employees will adjust positively to the changing technology.

 

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In a world where robots can increasingly do the work, education and skills are more important than ever, because they can equip us for lives in which many jobs no longer deliver adequate income, satisfaction, or status.

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The Skills Delusion

LONDON – Everybody agrees that better education and improved skills, for as many people as possible, is crucial to increasing productivity and living standards and to tackling rising inequality. But what if everybody is wrong?

Most economists are certain that human capital is as important to productivity growth as physical capital. And to some degree, that’s obviously true. Modern economies would not be possible without widespread literacy and numeracy: many emerging economies are held back by inadequate skills.

But one striking feature of the modern economy is how few skilled people are needed to drive crucial areas of economic activity. Facebook has a market value of $374 billion but only 14,500 employees. Microsoft, with a market value of $400 billion, employs just 114,000. GlaxoSmithKline, valued at over $100 billion, has a headcount of just 96,000.

The workforces of these three companies are but a drop in the ocean of the global labor market. And yet they deliver consumer services enjoyed by billions of people, create software that supports economy-wide productivity improvements, or develop drugs that can deliver enormous health benefits to hundreds of millions of people.

This disconnect between employment and value added reflects the role of information and communications technology (ICT), which is distinctive in two crucial respects. First, in line with Moore’s Law, the pace of hardware productivity improvement is dramatically faster than it was at earlier stages of technological change. Second, once software is created, it can be copied limitless times at almost zero marginal cost. Taken together, these factors enable low-cost automation of ever more economic activities, driven by the high skills of only a tiny minority of the workforce.

Despite this phenomenon, more people than ever seek higher education levels, evidently motivated by the fact that higher skills bring higher pay. But many higher-paid jobs may play no role in driving productivity improvement. If more people become more highly skilled lawyers, legal cases may be fought more effectively and expensively on both sides, but with no net increase in human welfare.

The economic consequences of much financial trading are similarly zero-sum. But so, too, may be much of the activity devoted to developing new fashions or brands, with high skill and great energy devoted to competing for consumer attention and market share, but none of it necessarily resulting in an increase in human welfare.

More people receiving higher education does not therefore mean that their higher skills in all cases drive productivity growth. And rising university tuition and fees – growing in the US at a trend annual rate of about 6% in real terms – may not indicate that ever-higher skills are needed to perform specific jobs. Rather, future job applicants may simply be willing to spend a lot of money to signal to employers that they have high-value skills.

Universities, in turn, can become caught in a zero-sum competition of ever-increasing expenditure to attract paying students. And rapidly rising student debt – up from $400 billion to $1.3 trillion in the US alone since 2005 – may partly be financing more intense competition for high-paid jobs, not socially required investments in human capital.

Likewise, at the lower end of the income scale, it is not clear that better skills can significantly offset rising inequality. New jobs can always be created as we automate away many existing jobs, but the new jobs often pay less.

Projections by the US Bureau of Labor Statistics (BLS) for job creation over the next ten years illustrate the pattern. Of the top ten occupational categories that account for 29% of all forecast job creation, only two – registered nurses and operational managers – pay more, on average, than US median earnings, while most of the other eight pay far less.

Employment is growing fastest in face-to-face services such as personal care. These jobs are more difficult to automate than manufacturing or information services; but, according to the BLS, they require only limited formal skills or on-the-job training. And job categories that require specialist ICT skills do not even make the top ten. The BLS foresees 458,000 more personal-care aides and 348,000 home health aides, but only 135,000 more software and application developers.

But wouldn’t better skills enable people currently in rapidly growing but low-pay job categories to get higher paid jobs? In many cases, the answer may be no. However many people are able to code, only a very small number will ever be employed for their coding skills. And even if someone currently in a low-skill job is equipped to perform a high-skilled one at least adequately, that job may still go to an employee with yet higher skills, and the pay differential may still be great: in many jobs, relative skill ranking may matter more than absolute capability.

So “better education and more skills for all” may be less important to productivity growth and a less powerful tool to offset inequality than conventional wisdom supposes. But that would not undermine in the least the personal and social value of education.

As many people as possible should be highly literate, aware of and fascinated by the basics of science, and enthused by and able to understand good design or music. After all, in a world where automation can free us from the drudgery of endless work, a good education will better equip us to live satisfying lives, regardless of whether it increases individual pay or measured prosperity.

As for inequality, we may need to offset it through overt redistribution, with higher minimum wages or income support unrelated to people’s price in the job market, and through generous provision of high-quality public goods.

In a world where robots can increasingly do the work, education and skills are more important than ever – not because they can raise everyone’s price in the labor market, but because they can equip us for lives in which many jobs no longer deliver adequate income, satisfaction, or status.

 

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The rapid advance of artificial intelligence and robotics means that even if manufacturing output in the US stabilizes or ticks upwards, it will not involve anywhere near the number of middle-skill jobs that it did in the past. Likewise, automation will erode the number of currently well-paid jobs in the service sector.

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The Politics of Job Polarization

WASHINGTON, DC – A core problem in the United States today – reflected in Donald Trump’s victory in the presidential election earlier this month – is that too many Americans feel helpless and insecure in the face of the job polarization that has resulted from globalization and new technology. While highly educated people at the top of the income distribution are doing better than ever, people with only a high school education face declining incomes, living standards, and prospects for themselves and their children. The middle class is being torn apart.

Trump won largely because he persuaded voters in Pennsylvania, Michigan, Wisconsin, and elsewhere that his policies will yield better outcomes in communities where manufacturing is declining. In fact, his administration, backed by Republican majorities in both houses of the US Congress, will likely only make things worse for hard-pressed Americans.

The underlying problem is new technology, specifically information technology, and the way it has transformed the nature of work. As David Autor and David Dorn have shown, many middle-skill, middle-income, middle-class jobs have disappeared. The new jobs that have emerged are well paid for highly educated people and poorly paid for people who have only a high school education. A leading symptom – but only a symptom – is the disappearance of well-paid factory jobs. Employment in manufacturing fell by more than two million from 2004 to 2014, and now accounts for just over 8% of total employment – continuing a long decline since the 1950s.

This technology-driven trend has been compounded by the effects of decreased transportation and communication costs, making it cheaper to move goods over long distances. Growing networks of sophisticated suppliers make it easier to move manufacturing activity overseas to lower-wage locations. Many US companies have made this a significant part of their business strategy, with the resulting decline of US manufacturing going hand in hand with a decline in unionization. When people lose a relatively high-wage and high-benefit union job, they often are reemployed at a lower wage and without the same level of benefits.

The 2008 financial crisis exacerbated income inequality and economic insecurity in part by accelerating the loss of manufacturing jobs. Arguments that it was necessary, or even “optimal,” to skew financial support from the government toward banks and their executives are not persuasive (at least, not outside Wall Street). Yes, well-off Americans experienced a big plunge in wealth when asset prices tanked. But they have since benefited from robust recovery in stock prices and high-end real estate.

In this environment, with so many people insecure about their economic prospects, the push by President Barack Obama’s administration for the Trans-Pacific Partnership (TPP) was a tone-deaf approach, at best. The administration argued that TPP would create some good jobs – and that people who lost jobs as a result could be “compensated.” But such compensation always proves to be minimal and is widely viewed as meaningless. That’s why Trump racked up large majorities in so many working-class bastions that had previously supported Obama.

Unfortunately, life is about to get worse for these voters. With control of the presidency and Congress, the Republicans are likely to pursue three main economic policies. Lowering personal and corporate taxes will primarily help richer Americans. Repeal of Obama’s signature health-care reform will have a severe impact on many lower-income people as they lose affordable insurance coverage. And financial deregulation will mostly favor large global banks, encourage reckless risk-taking, and set the stage for another large-scale crisis. In addition, the confrontational trade measures that Trump has proposed are likely to make the employment situation worse.

At the same time, the extent of any effective stimulus to the economy is likely to be very small. Overheating the economy – leading to higher inflation and higher interest rates – does not typically help lower-income people (remember the 1970s).

Trump’s main substantive promise has been to bring back middle-class jobs, particularly in manufacturing. But nothing in his policies or the broader Republican program will address the underlying issue of technological change. And the next wave of technology, including driverless vehicles, will have a major negative impact on the incomes and opportunities of everyone who currently delivers goods or transports passengers by car.

Moreover, the rapid advance of artificial intelligence and robotics means that even if manufacturing output in the US stabilizes or ticks upwards, it will not involve anywhere near the number of middle-skill jobs that it did in the past. Likewise, automation will erode the number of currently well-paid jobs in the service sector.

Given the role of technology in displacing workers, protectionism – tearing up trade agreements and imposing tariffs on Chinese and Mexican goods – won’t bring back high-paying manufacturing jobs, and Trump has no plan B. That means the polarization of America that brought Trump to power will only become far more severe.

 

A World Without Work?

Read Comments (7)
  1. Comment Commented

    The debate on the "dangers and opportunities" of robots taking over human jobs is too often depicted as an unprecedented global issue, but the reality is that the inherent dynamics and trade-offs are very similar to what happened during the Industrial Revolution - that is, machines increasing productivity, killing jobs and imposing new educational requirements. The difference now, one might argue, is that change is coming faster. But it is inevitable, not a choice, and so the question for policy makers, business leaders, entrepreneurs and citizens in general is not IF automatization should be considered a threat or an opportunity, because just like the Industrial Revolution, the answer is simply "both". The more important question is: GIVEN that robots will substitute humans in different contexts of our economy, WHAT opportunities can we envision to both prepare ourselves for the future and creating it? Read more

  2. Comment Commented

    Value is only created with consumption; it’s a subjective construct only possible by human fruition of goods.… We need humans to buy goods and produce profits; hence we will always need workers.

    The change of the paradigm of a resource constrained economy for the economy of the plentiful is hard to grasp for many. They will try to artificially constrain the resources but we are so far on the road of human development that this is an impossible thing to do.

    In our society one human equals one vote, not one dollar one vote, so we has a society will inevitably change the way we see wealth and determine our purpose has a race and has an individual. What’s the point of a life dedicated to the accumulation of a shiny yellow metal buried under a mountain or a bunch of zeros and ones in a computer system?
    Read more

  3. Comment Commented

    "Most economists are certain that human capital is as important to productivity growth as physical capital. And to some degree, that’s obviously true. "

    How can someone even think this, and write it on an article and call himself an economist? Most important determinants of productivity are technology and scale, that although related, have nothing to do with both capital and work.

    You can only determine the productivity of a factor by holding the rest constant, so they are independent variables by definition... Read more

  4. Comment Commented

    It seems that network externality is more powerful than discovery of new molecules to create shareholders' value. At the middle of the value proposition is software, having zero marginal cost. Further you move from material to network externality centric value proposition, higher the per person shareholders' value creation. Is this model scalable? Read more

  5. Comment Commented

    Really i m scared just by thinking of this issue. I read that millions want to leave the African continent for Europe -basically in search of a job and a higher living std. However, as highlighted by the writers, big biz corps don't need that high no. of employees and the trend is that the ratio is likely to go higher. So what will the jobless do? Is that a reason why many have become pirates, smugglers or runners for bookies? Read more

  6. Comment Commented

    It is unfortunate that both writers have completely ignored the millions of workers who have been laid off from IT, banks, car plants, steel plants, oil sector, real estate sector, retail sector, trade, shipping, coal and tourism sectors etc.

    Automation is just one minor factor bringing employment down. Terrorism is another factor. Demand destruction is third one and most major one.

    Can the writers espouse why France, Turkey, Brazil and Tunisia etc are literally shutting down? It's not purely tech. It is due to terrorism!

    It isn't entirely new technology. Because just in 2016 till date more tech jobs have been lost than in Y2K collapse.

    There is simply no work in countries as large as India and Brazil. Not to mention GCC and Nigeria.

    Job cuts create terrorism as a consequence.

    Not everything in this world is a straight line.

    Else the guys who won the Nobel Prize for Risk Free rate would be still useful in a Zero Rate World. Most Nobel formulas from the 80's and 90's have been turned on their head due to QE, bail outs and ZIRP.

    Technology will continue to develop and make matters worse at a time when Earth has most humans in it's history, a jump from 1 billion in 1870's to 7.4 bn today in 2016 and we, humans, simply keep collecting degrees when we need more peace, more equality and more jobs for all of us and our children.

    I wish we would talk about jobs that create human welfare instead of military jobs that create death and destruction and ironically even those jobs are shrinking where the US Army has reduced in size in hundreds of thousands due to drones and missiles usage.

    We live in a sad world indeed! Read more