Technology and the employment challenge

Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution.

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.

The opinions expressed here are those of the author, not necessarily those of the World Economic Forum. Published in collaboration with http://www.project-syndicate.org.

 Image: Robots and car chassis are seen on an assembly line in Ulsan REUTERS/Paul Baker