Digital revolution and Social Change
Wealth without workers, workers without wealth
The digital revolution is bringing sweeping change to labour markets in both rich and poor worlds
TTECHNOLOGICAL revolutions are best appreciated from a distance. The great inventions of the 19th century, from electric power to the internal-combustion engine, transformed the human condition. Yet for workers who lived through the upheaval, the experience of industrialisation was harsh: full of hard toil in crowded, disease-ridden cities.
The modern digital revolution—with its hallmarks of computer power, connectivity and data ubiquity—has brought iPhones and the internet, not crowded tenements and cholera, but it is disrupting and dividing the world of work on a scale not seen for more than a century. Vast wealth is being created without many workers; and for all but an elite few, work no longer guarantees a rising income.
So far, the upheaval has been felt most by low- and mid-skilled workers in rich countries. The incomes of the highly educated—those with the skills to complement computers—have soared, while pay for others lower down the skill ladder has been squeezed. In half of all OECD countries real median wages have stagnated since 2000. Countries where employment is growing at a decent clip, such as Germany or Britain, are among those where wages have been squeezed most.
In the coming years the disruption will be felt by more people in more places, for three reasons. First, the rise of machine intelligence means more workers will see their jobs threatened. The effects will be felt further up the skill ladder, as auditors, radiologists and researchers of all sorts begin competing with machines. Technology will enable some doctors or professors to be much more productive, leaving others redundant.
Second, wealth creation in the digital era has so far generated little employment. Entrepreneurs can turn their ideas into firms with huge valuations and hardly any staff. Oculus VR, a maker of virtual-reality headsets with 75 employees, was bought by Facebook earlier this year for $2 billion. With fewer than 50,000 workers each, the giants of the modern tech economy such as Google and Facebook are a small fraction of the size of the 20th century’s industrial behemoths.
Third, these shifts are now evident in emerging economies. Foxconn, long the symbol of China’s manufacturing economy, at one point employed 1.5m workers to assemble electronics for Western markets. Now, as the costs of labour rise and those of automated manufacturing fall, Foxconn is swapping workers for robots. China’s future is more Alibaba than assembly line: the e-commerce company that recently made a spectacular debut on the New York Stock Exchange employs only 20,000 people.
The digital transformation seems to be undermining poor countries’ traditional route to catch-up growth. Moving the barely literate masses from fields to factories has become harder. If India, for instance, were to follow China’s development path, it would need skilled engineers and managers to build factories to employ millions of manufacturing workers. But, thanks to technological change, its educated elite is now earning high salaries selling IT services to foreigners. The digital revolution has made an industrial one uneconomic.
Bridging the gap
None of this means that the digital revolution is bad for humanity. Far from it. Technology is, by and large, an engine of progress. IT has transformed the lives of billions for the better, often in ways that standard income measures do not capture. Communication, knowledge and entertainment have become all but free. Few workers would want to go back to a world without the internet, the smartphone or Facebook, even for a pay increase. Technology also offers new ways to earn a living. Etsy, an online marketplace for arts and crafts, enables hobbyists to sell their wares around the world. Uber, the company that is disrupting the taxi business, allows tens of thousands of drivers to work as and when they want.
Nonetheless, the growing wedge between a skilled elite and ordinary workers is worrying. Angry voters whose wages are stagnant will seek scapegoats: witness the rise of xenophobia and protectionism in the rich world. In poor countries dashed expectations and armies of underemployed people are a recipe for extremism and unrest. Governments across the globe therefore have a huge interest in helping remove the obstacles that keep workers from wealth.
The answer is not regulation or a larger state. High minimum wages will simply accelerate the replacement of workers by machines. Punitive tax rates will deter entrepreneurship and scare off the skilled on whom prosperity in the digital era depends. The best thing governments can do is to raise the productivity and employability of less-skilled workers. That means getting rid of daft rules that discourage hiring, like protections which make it difficult to sack poor performers. It means better housing policy and more investment in transport, to help people work in productive cities such as London and Mumbai. It means revamping education. Not every worker can or should complete an advanced degree, but too many people in poor countries still cannot read and too many in rich ones fail to complete secondary school. In future, education should not be just for the young: adults will need lifetime learning if they are to keep up with technological change.
Yet although governments can mitigate the problem, they cannot solve it. As technology progresses and disrupts more jobs, more workers will be employable only at lower wages. The modest earnings of the generation that technology leaves behind will need to be topped up with tax credits or wage subsidies. That need not mean imposing higher tax rates on the affluent, but it does mean closing the loopholes and cutting the giveaways from which they benefit.
In the 19th century, it took the best part of 100 years for governments to make the investment in education that enabled workers to benefit from the industrial revolution. The digital revolution demands a similarly bold, but swifter, response.
The third great wave : The first two industrial revolutions inflicted plenty of pain but ultimately benefited everyone. The digital one may prove far more divisive, argues
MOST PEOPLE ARE discomfited by radical change, and often for good reason. Both the first Industrial Revolution, starting in the late 18th century, and the second one, around 100 years later, had their victims who lost their jobs to Cartwright’s power loom and later to Edison’s electric lighting, Benz’s horseless carriage and countless other inventions that changed the world. But those inventions also immeasurably improved many people’s lives, sweeping away old economic structures and transforming society. They created new economic opportunity on a mass scale, with plenty of new work to replace the old.
A third great wave of invention and economic disruption, set off by advances in computing and information and communication technology (ICT) in the late 20th century, promises to deliver a similar mixture of social stress and economic transformation. It is driven by a handful of technologies—including machine intelligence, the ubiquitous web and advanced robotics—capable of delivering many remarkable innovations: unmanned vehicles; pilotless drones; machines that can instantly translate hundreds of languages; mobile technology that eliminates the distance between doctor and patient, teacher and student. Whether the digital revolution will bring mass job creation to make up for its mass job destruction remains to be seen.
Powerful, ubiquitous computing was made possible by the development of the integrated circuit in the 1950s. Under a rough rule of thumb known as Moore’s law (after Gordon Moore, one of the founders of Intel, a chipmaker), the number of transistors that could be squeezed onto a chip has been doubling every two years or so. This exponential growth has resulted in ever smaller, better and cheaper electronic devices. The smartphones now carried by consumers the world over have vastly more processing power than the supercomputers of the 1960s.
Moore’s law is now approaching the end of its working life. Transistors have become so small that shrinking them further is likely to push up their cost rather than reduce it. Yet commercially available computing power continues to get cheaper. Both Google and Amazon are slashing the price of cloud computing to customers. And firms are getting much better at making use of that computing power. In a book published in 2011, “Race Against the Machine”, Erik Brynjolfsson and Andrew McAfee cite an analysis suggesting that between 1988 and 2003 the effectiveness of computers increased 43m-fold. Better processors accounted for only a minor part of this improvement. The lion’s share came from more efficient algorithms.
The beneficial effects of this rise in computing power have been slow to come through. The reasons are often illustrated by a story about chessboards and rice. A man invents a new game, chess, and presents it to his king. The king likes it so much that he offers the inventor a reward of his choice. The man asks for one grain of rice for the first square of his chessboard, two for the second, four for the third and so on to 64. The king readily agrees, believing the request to be surprisingly modest. They start counting out the rice, and at first the amounts are tiny. But they keep doubling, and soon the next square already requires the output of a large ricefield. Not long afterwards the king has to concede defeat: even his vast riches are insufficient to provide a mountain of rice the size of Everest. Exponential growth, in other words, looks negligible until it suddenly becomes unmanageable.
Messrs Brynjolfsson and McAfee argue that progress in ICT has now brought humanity to the start of the second half of the chessboard. Computing problems that looked insoluble a few years ago have been cracked. In a book published in 2005 Frank Levy and Richard Murnane, two economists, described driving a car on a busy street as such a complex task that it could not possibly be mastered by a computer. Yet only a few years later Google unveiled a small fleet of driverless cars. Most manufacturers are now developing autonomous or near-autonomous vehicles. A critical threshold seems to have been crossed, allowing programmers to use clever algorithms and massive amounts of cheap processing power to wring a semblance of intelligence from circuitry.
Evidence of this is all around. Until recently machines have found it difficult to “understand” written or spoken language, or to deal with complex visual images, but now they seem to be getting to grips with such things. Apple’s Siri responds accurately to many voice commands and can take dictation for e-mails and memos. Google’s translation program is lightning-fast and increasingly accurate, and the company’s computers are becoming better at understanding just what its cameras (as used, for example, to compile Google Maps) are looking at.
At the same time hardware, from processors to cameras to sensors, continues to get better, smaller and cheaper, opening up opportunities for drones, robots and wearable computers. And innovation is spilling into new areas: in finance, for example, crypto-currencies like Bitcoin hint at new payment technologies, and in education the development of new and more effective online offerings may upend the business of higher education.
This wave, like its predecessors, is likely to bring vast improvements in living standards and human welfare, but history suggests that society’s adjustment to it will be slow and difficult. At the turn of the 20th century writers conjured up visions of a dazzling technological future even as some large, rich economies were limping through a period of disappointing growth in output and productivity. Then, as now, economists hailed a new age of globalisation even as geopolitical tensions rose. Then, as now, political systems struggled to accommodate the demands of growing numbers of dissatisfied workers.
Some economists are offering radical thoughts on the job-destroying power of this new technological wave. Carl Benedikt Frey and Michael Osborne, of Oxford University, recently analysed over 700 different occupations to see how easily they could be computerised, and concluded that 47% of employment in America is at high risk of being automated away over the next decade or two. Messrs Brynjolfsson and McAfee ask whether human workers will be able to upgrade their skills fast enough to justify their continued employment. Other authors think that capitalism itself may be under threat.
The global eclipse of labour
The digital revolution is opening up a great divide between a skilled and wealthy few and the rest of society. In the past new technologies have usually raised wages by boosting productivity, with the gains being split between skilled and less-skilled workers, and between owners of capital, workers and consumers. Now technology is empowering talented individuals as never before and opening up yawning gaps between the earnings of the skilled and the unskilled, capital-owners and labour. At the same time it is creating a large pool of underemployed labour that is depressing investment.
The digital revolution is opening up a great divide between a skilled and wealthy few and the rest of society
The effect of technological change on trade is also changing the basis of tried-and-true methods of economic development in poorer economies. More manufacturing work can be automated, and skilled design work accounts for a larger share of the value of trade, leading to what economists call “premature deindustrialisation” in developing countries. No longer can governments count on a growing industrial sector to absorb unskilled labour from rural areas. In both the rich and the emerging world, technology is creating opportunities for those previously held back by financial or geographical constraints, yet new work for those with modest skill levels is scarce compared with the bonanza created by earlier technological revolutions.
All this is sorely testing governments, beset by new demands for intervention, regulation and support. If they get their response right, they will be able to channel technological change in ways that broadly benefit society. If they get it wrong, they could be under attack from both angry underemployed workers and resentful rich taxpayers. That way lies a bitter and more confrontational politics.
The digital revolution has yet to fulfil its promise of higher productivity and better jobs
IF THERE IS a technological revolution in progress, rich economies could be forgiven for wishing it would go away. Workers in America, Europe and Japan have been through a difficult few decades. In the 1970s the blistering growth after the second world war vanished in both Europe and America. In the early 1990s Japan joined the slump, entering a prolonged period of economic stagnation. Brief spells of faster growth in intervening years quickly petered out. The rich world is still trying to shake off the effects of the 2008 financial crisis. And now the digital economy, far from pushing up wages across the board in response to higher productivity, is keeping them flat for the mass of workers while extravagantly rewarding the most talented ones.
Between 1991 and 2012 the average annual increase in real wages in Britain was 1.5% and in America 1%, according to the Organisation for Economic Co-operation and Development, a club of mostly rich countries. That was less than the rate of economic growth over the period and far less than in earlier decades. Other countries fared even worse. Real wage growth in Germany from 1992 to 2012 was just 0.6%; Italy and Japan saw hardly any increase at all. And, critically, those averages conceal plenty of variation. Real pay for most workers remained flat or even fell, whereas for the highest earners it soared.
It seems difficult to square this unhappy experience with the extraordinary technological progress during that period, but the same thing has happened before. Most economic historians reckon there was very little improvement in living standards in Britain in the century after the first Industrial Revolution. And in the early 20th century, as Victorian inventions such as electric lighting came into their own, productivity growth was every bit as slow as it has been in recent decades.
In July 1987 Robert Solow, an economist who went on to win the Nobel prize for economics just a few months later, wrote a book review for the New York Times. The book in question, “The Myth of the Post-Industrial Economy”, by Stephen Cohen and John Zysman, lamented the shift of the American workforce into the service sector and explored the reasons why American manufacturing seemed to be losing out to competition from abroad. One problem, the authors reckoned, was that America was failing to take full advantage of the magnificent new technologies of the computing age, such as increasingly sophisticated automation and much-improved robots. Mr Solow commented that the authors, “like everyone else, are somewhat embarrassed by the fact that what everyone feels to have been a technological revolution...has been accompanied everywhere...by a slowdown in productivity growth”.
This failure of new technology to boost productivity (apart from a brief period between 1996 and 2004) became known as the Solow paradox. Economists disagree on its causes. Robert Gordon of Northwestern University suggests that recent innovation is simply less impressive than it seems, and certainly not powerful enough to offset the effects of demographic change, inequality and sovereign indebtedness. Progress in ICT, he argues, is less transformative than any of the three major technologies of the second Industrial Revolution (electrification, cars and wireless communications).
Yet the timing does not seem to support Mr Gordon’s argument. The big leap in American economic growth took place between 1939 and 2000, when average output per person grew at 2.7% a year. Both before and after that period the rate was a lot lower: 1.5% from 1891 to 1939 and 0.9% from 2000 to 2013. And the dramatic dip in productivity growth after 2000 seems to have coincided with an apparent acceleration in technological advances as the web and smartphones spread everywhere and machine intelligence and robotics made rapid progress.
Have patience
A second explanation for the Solow paradox, put forward by Erik Brynjolfsson and Andrew McAfee (as well as plenty of techno-optimists in Silicon Valley), is that technological advances increase productivity only after a long lag. The past four decades have been a period of gestation for ICT during which processing power exploded and costs tumbled, setting the stage for a truly transformational phase that is only just beginning (signalling the start of the second half of the chessboard).
That sounds plausible, but for now the productivity statistics do not bear it out. John Fernald, an economist at the Federal Reserve Bank of San Francisco and perhaps the foremost authority on American productivity figures, earlier this year published a study of productivity growth over the past decade. He found that its slowness had nothing to do with the housing boom and bust, the financial crisis or the recession. Instead, it was concentrated in ICT industries and those that use ICT intensively.
That may be the wrong place to look for improvements in productivity. The service sector might be more promising. In higher education, for example, the development of online courses could yield a productivity bonanza, allowing one professor to do the work previously done by legions of lecturers. Once an online course has been developed, it can be offered to unlimited numbers of extra students at little extra cost.
Similar opportunities to make service-sector workers more productive may be found in other fields. For example, new techniques and technologies in medical care appear to be slowing the rise in health-care costs in America. Machine intelligence could aid diagnosis, allowing a given doctor or nurse to diagnose more patients more effectively at lower cost. The use of mobile technology to monitor chronically ill patients at home could also produce huge savings.
Such advances should boost both productivity and pay for those who continue to work in the industries concerned, using the new technologies. At the same time those services should become cheaper for consumers. Health care and education are expensive, in large part, because expansion involves putting up new buildings and filling them with costly employees. Rising productivity in those sectors would probably cut employment.
How the digital revolution can help some of the workers it displaces
NOT FAR INLAND from where India’s west coast meets the Arabian Sea, a modern high-rise building that looks a bit like a stack of hastily piled-up boxes grows from the streets of Mumbai. Called Antilia, it is the private residence of Mukesh Ambani, the chairman of Reliance Industries and reportedly the richest man in India. On a clear day, from the higher floors of his home, Mr Ambani can see the neighbourhood of Dharavi, about six miles to the north-east. The area, made famous by the film “Slumdog Millionaire”, is one of the world’s largest slums, a patchwork of blue tarpaulin, corrugated tin and teeming humanity. Few other places in the world display such a stark contrast in wealth and living conditions in such a small space.
Many of Dharavi’s people have shown extraordinary ambition and entrepreneurial verve, but until recently they were limited to light industry, such as pottery or leather processing. Everything they made was sold in the immediate neighbourhood, to people of broadly the same income and prospects as those who made them.
That is beginning to change. A recent story published in theFinancial Times featured a Dharavi resident, Mohammed Taushif Ansari, who earns nearly $20,000 a year selling leather goods through eBay to customers around the world. The spread of e-commerce around the globe opens up a huge new reservoir of purchasing power to those motivated enough to seek it. And that is just one of the ways technology is creating economic opportunities to replace at least some of the work it destroys. The critical question is just how much of the world’s available labour will find productive work in this supercharged new economy.
One hope rests on the creation of new kinds of jobs. In New York the old industrial warehouses and factories along Brooklyn’s waterfront are being turned into a thriving tech-industry hub. One of its star companies, Etsy, recently signed a deal to move to a new office twice the size of its previous one, to make room for its growing workforce.
Or some of it, anyway. Apart from the 750 or so people working directly for the company from its offices in Brooklyn and elsewhere, there is a second labour force, consisting of roughly 1m independent sellers the world over: craft-based entrepreneurs offering housewares, artwork, clothing and many other creative items. Sales last year were reported to be $1.35 billion, half as much again as the year before. The company says that for 18% of its sellers this business is a full-time job. Many others use income from Etsy to supplement pay from other work.
The global artisan
Etsy is part of a broad movement that represents one possible entrepreneurial response to a new and different economy. This began more than a decade ago when the sort of private transactions previously conducted through classified ads, car-boot sales and flea markets moved online, courtesy of companies like Craigslist and eBay. That move dramatically increased the value of the market for such goods by increasing its scale and raising the odds of achieving a match between a buyer and a seller. This market has since grown dramatically, powered by the pull of new opportunities and the push of economic strain across the rest of the labour market.
E-entrepreneurship received a boost in 2008 when Apple launched its app store, through which third-party software designers could market their own iPhone applications. The “app economy” has since grown by leaps and bounds. According to an estimate by the Progressive Policy Institute, a think-tank, in 2013 it provided work for more than 750,000 people in America alone. Many more take part in it from elsewhere in the world, including employees at Rovio, the Finnish firm behind the wildly popular “Angry Birds” line of mobile games, and people like Dong Nguyen, a young programmer in Vietnam who scored an unlikely app hit with “Flappy Bird”, a simple but addictive game that was at one point earning him $50,000 a day.
Amazon and other e-tailers allow authors and artists to self-publish and market their work around the world. YouTube offers a platform to a cast of phenomenally successful video producers, makers of comedy clips or video-game reviewers who can rack up billions of views. Odd genres flourish, like “unboxing clips” in which the star buys various trinkets and opens and describes them on camera. “DisneyCollectorBR”, an unboxing producer called Melissa Lima, specialises in unwrapping cheap toys. These clips, generally a few minutes long, apparently entrance small children. The advertising revenue from her videos may be earning Ms Lima up to $5m a year. Social networks often contribute to such hits by drawing attention to particular apps or products. In the future, to paraphrase Andy Warhol, everyone may trend on social media for 15 minutes—and earn a bit of extra income as they do so.
Mobile apps and networks are also democratising capital ownership in some sectors of the economy, including accommodation and passenger travel. Airbnb, for instance, allows householders to earn money by letting their home while they are away. Uber and Lyft blur the line between professional drivers and those with a spare seat in their private car. The “sharing economy” is increasingly indistinguishable from the mainstream economy; things that can now be borrowed via online apps include server space, home appliances, bicycles and tools. Other services connect people who own pets with those willing to look after them while the owners are away.
The logistical hurdles to entrepreneurship are quickly shrinking. Selling surplus goods or putting underused capital to work is as easy as creating an online profile. Startups are benefiting as well. New firms can rent computing power from Amazon through the cloud rather than having to buy expensive servers. Office space and support services are becoming ever easier to find, as is finance, thanks to peer-to-peer lenders and crowdfunding platforms like Kickstarter. Easy and cheap access to all the off-the-shelf components needed for a startup is fuelling the rise of “weightless companies”, firms that can attain extraordinary valuations with minimal staff and capital.
That is a very good thing in the eyes of those who see the rich world’s problems as a matter of too little innovation rather than too much. Michael Mandel, a technology expert at the Progressive Policy Institute, reckons that innovation is generally followed by growth in employment. That is most obviously true in ICT, but also in sectors like energy, where fracking technology has generated an oil boom and a jobs bonanza in states such as North Dakota and Texas. Mr Mandel invites sceptics to imagine a future in which doctors can 3D-print livers (and other organs) on demand—a technology that looks increasingly realistic. In addition to the significant health benefits that would result, organ printing would create new jobs, from workers to monitor the printers to nurses for the patients receiving transplants.
As innovation expands outward from ICT, so too should the jobs. Success in many of the newly available niches will often remain a matter of skill, whether the product on offer is a leather bag or a fancy app. But at least technology is making it easier and cheaper than ever to obtain new skills.
Beyond MOOCs
Informal online education is already a widespread and underappreciated aspect of modern economic life. YouTube is a treasury of how-tos, from making the perfect Bolognese to pronouncing words in an unfamiliar language. More important, teachers around the world have been putting academic coursework online for more than a decade, including reading material, syllabuses, video lectures and practice exams. For the price of a computer and an internet connection, motivated learners could work their way through several lifetimes’ worth of university degrees and save millions of dollars.
The online education market is now maturing. Massive Open Online Courses, or MOOCs, have struggled to live up to expectations, but online offerings are improving and expanding. America’s three largest providers of online education—edX, a non-profit service run by Harvard University and the Massachusetts Institute of Technology (MIT); Coursera, a for-profit service set up with academics from Stanford University; and Udacity, another for-profit with Stanford roots—have provided courses for an estimated 12m students so far. Other individuals and universities are also getting into the game. Some of them will offer complete online degrees.
Online education programmes have several big advantages over traditional models. These probably weigh most heavily with people living in developing economies who have few other options. MOOC enthusiasts like to tell the story of Battushig Myanganbayar, a Mongolian teenager who performed brilliantly in an online computer-science course offered by MIT. His story is no longer exceptional. EdX, which had nearly 400,000 students in 2012-13, reckons that almost half of them live outside the rich world.
Online education offers flexibility that the bricks-and-mortar sort cannot match. Busy students can fit it around their job or family schedule, work at their own pace and sample courses from universities the world over without leaving their homes. And, critically, online courses are significantly cheaper than the in-person kind. Many are offered free, though providers sometimes charge to certify exam results. Fees at Minerva Schools, an online institution that aims for top-notch students, are half of those at Ivy League universities. A new online master’s degree in computing at Georgia Tech costs just $7,000, compared with $25,000 for the on-campus alternative.
Lower costs not only make courses more accessible, they also encourage experimentation. Students can start work on a degree with little financial risk. This freedom to experiment has boosted drop-out rates, increasing scepticism about the courses’ viability. Yet the ease of dipping in and out is a virtue, improving the chances that students will take up online education in the first place and that if they keep trying they will hit on the right subject eventually.
A reduced price for higher education would be a boon to many families in America, where university can take a large bite out of household budgets (or saddle students with loads of debt). And education is just one of many things that new technology could deliver more cheaply. Over the past couple of decades prices of many physical goods, including televisions, computers and household appliances, have tumbled, particularly allowing for improvements in quality. The cost of communicating with friends and family, watching many videos and listening to many kinds of music is now close to zero.
Yet the cost of other items just keeps going up. In 1990 Americans on average spent 38% of their income on housing, health care and education. By 2010 that share had risen to 43%. In recent decades prices for all three of those categories have risen faster than for goods and services as a whole. Even if technology does not create many new jobs, if it brings down the cost of education and medical care as well as that of other goods and services, workers may nonetheless breathe a sight of relief.
Drops in the bucket
For many workers, those cheaper goods and services may be the only pecuniary gain they see from new technologies. New job and self-employment opportunities will provide some counterweight to the disruptive power of the digital revolution, but they are unlikely to offset it entirely. Tyler Cowen, an economist at George Mason University, Virginia, agrees that such innovations will allow highly motivated, talented and conscientious individuals to claw their way into a small elite of very well-paid workers, but fears that the remaining 85-90% of the population may find little to do in the new economy.
For many workers, cheaper goods and services may be the only pecuniary gain they see from new technologies
In the past, industrialisation often involved a loss of skills: a small group of first-class artisans was replaced by factories full of less-skilled workers producing goods at a much lower cost. Similarly, future advances in education and health care could reduce the earning power of many highly paid academics and doctors while creating jobs for more workaday tutors to help the laggards, or nurses enabled by technology to do much of the work now reserved for expensive physicians. Yet even these more mundane new jobs will still require specialised training and a combination of social and cognitive skills that will elude a large part of the labour force. And at the very top of these professions, “superstar” teachers or doctors using technology to reach many more people will do better than ever.
Expansion of online education and mobile health care might also give a boost to global trade in services, which could offer an alternative route to economic development in countries like India. People there might find work monitoring the vital signs of patients or marking essays from students across the globe. But first they would have to obtain the necessary skills, so this is unlikely to provide jobs for the masses. It might also prove controversial in some rich economies, where people who are currently doing such jobs could face downward pressure on their pay or lose them altogether.
Likewise, the employment effects of the sharing economy are not obviously egalitarian, since many drivers and hotel staff affected by it are relatively low-skilled and poorly paid and have few occupational options. New online labour services could help match former hotel staff with new jobs, perhaps cleaning homes let through schemes like Airbnb. Yet that begins to sound like a more efficient version of the domestic-service economy of the 19th century. America is already well on its way to that. A service called Taskrabbit allows well-off busy people to hire poorer and less busy ones for errands such as doing the shopping or queuing for theatre tickets on their behalf.
Meanwhile much of the work that can easily be done by those with minimal training—in retailing, for instance, or wholesale warehouses—is gradually being automated away. And the crowds of underemployed workers competing for jobs that robots still cannot do—such as caretaking—will ensure that pay for such work remains low.
This technological revolution could still hold many surprises. It may create vast numbers of jobs nobody has yet imagined, or boost the productivity of less-skilled workers in entirely novel ways, perhaps through robotic exoskeletons or brain implants. But for now, and despite the opportunities opened up by some new tech-based ventures, a generation of workers the world over is facing underemployment and stagnant pay. Governments will be sorely tested to deal with that.
The world has more than enough labour. Between 1980 and 2010, according to the McKinsey Global Institute, global nonfarm employment rose by about 1.1 billion, of which about 900m was in developing countries. The integration of large emerging markets into the global economy added a large pool of relatively low-skilled labour which many workers in rich countries had to compete with. That meant firms were able to keep workers’ pay low. And low pay has had a surprising knock-on effect: when labour is cheap and plentiful, there seems little point in investing in labour-saving (and productivity-enhancing) technologies. By creating a labour glut, new technologies have trapped rich economies in a cycle of self-limiting productivity growth.
Fear of the job-destroying effects of technology is as old as industrialisation. It is often branded as the lump-of-labour fallacy: the belief that there is only so much work to go round (the lump), so that if machines (or foreigners) do more of it, less is left for others. This is deemed a fallacy because as technology displaces workers from a particular occupation it enriches others, who spend their gains on goods and services that create new employment for the workers whose jobs have been automated away. A critical cog in the re-employment machine, though, is pay. To clear a glutted market, prices must fall, and that applies to labour as much as to wheat or cars.
Where labour is cheap, firms use more of it. Carmakers in Europe and Japan, where it is expensive, use many more industrial robots than in emerging countries, though China is beginning to invest heavily in robots as its labour costs rise. In Britain a bout of high inflation caused real wages to tumble between 2007 and 2013. Some economists see this as an explanation for the unusual shape of the country’s recovery, with employment holding up well but productivity and GDP performing abysmally.
Productivity growth has always meant cutting down on labour. In 1900 some 40% of Americans worked in agriculture, and just over 40% of the typical household budget was spent on food. Over the next century automation reduced agricultural employment in most rich countries to below 5%, and food costs dropped steeply. But in those days excess labour was relatively easily reallocated to new sectors, thanks in large part to investment in education. That is becoming more difficult. In America the share of the population with a university degree has been more or less flat since the 1990s. In other rich economies the proportion of young people going into tertiary education has gone up, but few have managed to boost it much beyond the American level.
At the same time technological advances are encroaching on tasks that were previously considered too brainy to be automated, including some legal and accounting work. In those fields people at the top of their profession will in future attract many more clients and higher fees, but white-collar workers with lower qualifications will find themselves displaced and may in turn displace others with even lesser skills.
Lift out of order
A new paper by Peter Cappelli, of the University of Pennsylvania, concludes that in recent years over-education has been a consistent problem in most developed economies, which do not produce enough suitable jobs to absorb the growing number of college-educated workers. Over the next few decades demand in the top layer of the labour market may well centre on individuals with high abstract reasoning, creative, and interpersonal skills that are beyond most workers, including graduates.
Most rich economies have made a poor job of finding lucrative jobs for workers displaced by technology, and the resulting glut of cheap, underemployed labour has given firms little incentive to make productivity-boosting investments. Until governments solve that problem, the productivity effects of this technological revolution will remain disappointing. The impact on workers, by contrast, is already blindingly clear.
Emerging economies
Arrested development
The model of development through industrialisation is on its way out
THIRTY-FIVE YEARS ago Shenzhen was a tiny fishing village just over the river from British Hong Kong. Its inhabitants, like most Chinese, lived in poverty. In 1978 the average income in America was about 21 times that in China. But in 1979 China’s leader, Deng Xiaoping, chose Shenzhen as the country’s first special economic zone, free to experiment with market activity and trade with the outside world. Shenzhen quickly found itself at the leading edge of Chinese economic development, using the same model as Japan, South Korea and Hong Kong itself had done at earlier stages. In the late 1970s China was bursting with cheap, unskilled labour. It opened its doors (a crack, in lucky places like Shenzhen) to foreign manufacturers waiting to take advantage of these low labour costs. Even though wages were at rock bottom, both productivity and pay in urban factories were dramatically higher than in agriculture, so China’s fledgling industrialisation attracted a steady flow of migrants from the countryside.
Over time local production became more sophisticated and wages went up. Industrial cities served as escalators for development, linking the Chinese economy with global markets and allowing incomes to rise steadily. The fruits of this process are clearly visible. As visitors approach the checkpoints between Hong Kong and the mainland, a modern skyline rises on the horizon. Great glass-sheathed skyscrapers reach upwards in central Shenzhen, which boasts some of the world’s tallest buildings. At street level Chinese workers stroll past shopfronts displaying Western luxury brands: Ferrari, Bulgari, Louis Vuitton.
Governments across the emerging world dream of repeating China’s success, but the technological transformation now under way appears to be permanently changing the economics of development. China may be among the last economies to be able to ride industrialisation to middle-income status. Much of the emerging world is facing a problem that Dani Rodrik, of the Institute for Advanced Study in Princeton, New Jersey, calls “premature deindustrialisation”.
For most of recent economic history, “industrialised” meant rich. And indeed most countries that were highly industrialised were rich, and were rich because they were industrialised. Yet this relationship has broken down. Arvind Subramanian, of the Peterson Institute for International Economics and reportedly soon to become chief economic adviser to the Indian government, notes that, at any given level of income, countries today are less reliant on manufacturing, in terms of both output and employment, than they were in the past, and that the level of income per person at which reliance on manufacturing peaks has also declined steadily. When South Korea reached that point in 1988, its workers’ earnings averaged just over $10,000 (in PPP-adjusted 2011 dollars) per person. When Indonesia got there in 2002, average income was just under $6,000, and for India in 2008 it was just over $3,000.
Premature non-industrialisation
Early loss of industry (or, in India’s case, what Mr Subramanian calls “premature non-industrialisation”) is a distressing trend, given the role that exports of goods have historically played in economic development. Productivity in export industries is generally high, otherwise they could not compete in global markets. Over time, productivity in making traded goods tends to rise as firms and workers in the industry become familiar with the technologies involved. Past developmental success stories such as the Asian tigers moved from low-margin, labour-intensive goods such as clothing and toys to electronics assembly, then on to component manufacture and, in the textbook cases of Japan and South Korea, to advanced manufacturing, design and management.
Export success trickles down to the rest of developing economies. Since producers of non-traded goods and services, such as housebuilders and lawyers, must compete with exporters for labour, they need to pay attractive wages. At the same time the chance of well-paid work in manufacturing creates an incentive for workers to move to cities and invest in education. An industrialising export sector is like a speedboat that pulls the rest of the economy out of poverty.
Loss of industry at low income levels, by contrast, caps the contribution that manufacturing can make to domestic living standards. That is no small problem: there is no obvious alternative strategy for turning poor countries into rich ones.
The change in technology’s role in development began in the 1980s. Richard Baldwin, an economist at the Graduate Institute of International and Development Studies in Geneva, explains that for much of modern economic history the driving force behind globalisation was the falling cost of transport. Powered shipping in the 19th century and containerisation in the 20th brought down freight charges, in effect shrinking the world. Yet since the 1980s, he says, cheap and powerful ICT has played a bigger role, allowing firms to co-ordinate production across great distances and national borders. Manufacturing “unbundled” as supply chains scattered across the world.
According to Mr Baldwin, this meant a profound change in what it is to be industrialised. The development of an industrial base in Japan and South Korea was a long and arduous process in which each economy needed to build capabilities along the whole of a supply chain to manufacture finished goods. That meant few economies managed the trick, but those that did were rewarded with a rich and diverse economy.
In the era of supply-chain trade, by contrast, industrialisation means little more than opening labour markets to global manufacturers. Countries that can grab pieces of global supply chains are quickly rewarded with lots of manufacturing employment. But development that is easy-come may also be easy-go. Unless the economies concerned quickly build up their workers’ skills and infrastructure, wage increases will soon lead manufacturers to up sticks for cheaper locations.
From stuff to fluff
Another mechanism through which new technology is changing the process of development is the dematerialisation of economic activity. Consumption the world over is shifting from “stuff to fluff”, reckons Mr Subramanian. People everywhere are spending a larger share of their income on services such as health care, education and telecommunications. This shift is reflected in trade. Messrs Subramanian and Kessler note that, measured in gross terms, goods shipments dominate trade as much as ever. They accounted for 80% of world exports in 2008 (the most recent figure available), down only slightly from 83% in 1980. Measured in value-added terms, however, the importance of goods trade tumbled, from 71% of world exports in 1980 to just 57% in 2008, because of the increasing weight of services in the production of traded goods. Much of the value of an iPhone, for example, derives from the original design and engineering of the product rather than from its components and assembly.
A recent report by the McKinsey Global Institute put the value in 2012 of “knowledge-intensive” trade—meaning flows of goods or services in which research and development or skilled labour contribute a large share of value—at $12.6 trillion, or nearly half the total value of trade in goods, services and finance. Physical assembly accounts for a declining share of the value of finished goods. The knowledge-intensive component of trade is also growing more quickly than trade in labour-, capital- or resource-intensive products and services. At the same time the dramatic decline in the cost of information and communications technologies has opened up trade in some high-value services. Skilled programmers in India, for example, can sell IT services around the world despite the low overall level of development of the Indian economy.
India has masses of cheap, unskilled labour that ought to be attractive to firms wanting to set up low-cost manufacturing facilities. Yet operating them would require at least some skilled workers, and the rising premium on these created by trade in ICT services makes it uneconomic for many would-be manufacturers to hire the necessary talent. Mr Subramanian and Raghuram Rajan, another Indian economist, have dubbed this the “Bangalore bug”, a reference to the extraordinarily successful ICT cluster in the southern Indian city of Bangalore. But other emerging economies are similarly affected.
Other advances are eliminating the need for human labour altogether. Walking through an electronics production line at Foxconn’s Longhua campus in Shenzhen, a worker points out places where people have already been replaced by machinery—“to reduce injuries to workers”, he says. Elsewhere on the line he indicates a place where a robot is being tested to take over a range of tasks from humans. Perhaps 10% of the staff at Longhua now consists of engineers working on such automation.
Successful solutions will be rolled out to other Foxconn facilities, says Louis Woo, a special adviser to Foxconn’s chairman, Terry Gou. And Foxconn has even greater ambitions. In Chengdu it is working on a “lights out”, entirely automated, facility which serves a single, as yet unnamed, customer. In fast-developing and rapidly ageing China workers are becoming increasingly expensive, as well as hard to find. Automation provides a means to hold on to work that might otherwise pack up and move to another country.
It also saves a lot of trouble. Vast areas of Foxconn’s Longhua campus are given over to support services for the roughly quarter of a million workers employed there: shops and restaurants, a massive central kitchen with automated rice-cooking equipment, dormitories that house about half the staff, schools for workers’ children and counselling services for distressed employees. Foxconn’s dormitories are ringed with netting, a precaution prompted by an epidemic of suicides by workers that set off a torrent of bad press for the company and its customers. Indeed, notes Mr Woo, it is often customers that are behind the push for greater automation of Foxconn’s facilities.
The falling cost of automation makes the use of robots attractive even in India, where cities are swarming with underemployed young workers. The main reason for that is the country’s thicket of red tape. Mr Subramanian thinks India’s best hope now may be to concentrate on churning out more highly skilled workers, rather than count on manufacturing to mop up its jobless millions.
The rapid growth in emerging economies over the past 15 years was good for many very poor countries in Africa and Central America, but most still grew more slowly than richer developing countries in Asia and South America. Given the institutional weakness, inadequate infrastructure and modest skills base in many of the world’s poorest places, even rock-bottom wages there may be insufficient to attract much manufacturing.
That is a distressing prospect. The United Nations estimates that sub-Saharan Africa’s population will roughly triple over the next half-century, to about 2.7 billion. A development model in which rapidly rising incomes are limited to a highly skilled few is unlikely to be sustainable. Many talented workers are already thinking about emigrating, yet rich economies trapped by growing social spending and shrinking tax bases are more likely to slam their borders shut. Over the past decade or two inequality, despite rising within many economies, has shrunk at the global level, thanks to rapid growth in large emerging markets. But in the absence of a new development model, that happy state of affairs may soon be reversed.
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