Saturday, 10 November 2012

Technological shocks and (un)employment

I ran across a great article from Ken Rogoff on Project Syndicate a few weeks ago where he dismantles the ever-present assumption among politicians and voters that new abrupt technological changes lead to massive unemployment.
"Since the dawn of the industrial age, a recurrent fear has been that technological change will spawn mass unemployment. Neoclassical economists predicted that this would not happen, because people would find other jobs, albeit possibly after a long period of painful adjustment.

By and large, that prediction has proven to be correct. Two hundred years of breathtaking innovation since the dawn of the industrial age have produced rising living standards for ordinary people in much of the world, with no sharply rising trend for unemployment. Yes, there have been many problems, notably bouts of staggering inequality and increasingly horrific wars. On balance, however, throughout much of the world, people live longer, work much fewer hours, and lead generally healthier lives.

...the basic point is that the market has a way of transforming jobs and opportunities in ways that no one can predict. [my emphasis]
For one thing, mankind will be confronted with more complex economic and moral questions as technology accelerates. Still, even as technological change accelerates, nothing suggests a massive upward shift in unemployment over the next few decades.

Of course, some increase in unemployment as a result of more rapid technological change is certainly likely, especially in places like Europe, where a plethora of rigidities inhibit smooth adjustment. For now, however, the high unemployment of the past several years should be mainly attributed to the financial crisis, and should ultimately retreat toward historical benchmark levels."
Rogoff raises a few excellent points. The most important one is that no one can predict the new way of transforming technological growth into new jobs and opportunities. In addition, technological improvements will always have a net positive effect on job creation in the long run. Here's some of the effects, summarized by a research done from the St.Louis Fed in 2001: 

Source: Chiodo, Owyang (2001) "Low Unemployment: Old Dogs or New
 Federal Reserve Bank of St.Louis
As you can see technological growth seems to be causing a downward shift in unemployment. However, their conclusions state that technological changes aren't the only cause, as there is strong evidence that a part of this decrease in unemployment was caused by the aging baby-boom generation. They assign these two factors roughly similar weights in explaining the decrease in unemployment. 

Since this was done in 2001, I tried to find more data to see how these effects continued in the next decade. I didn't take technology as an index but rather as a real value of total inventories in IT industries (let's think of this as a proxy of some sort). 

Source: St.Louis Fed, FRED database 
Overall, we can see unemployment and (a proxy for) technological growth moving opposite to one another. This is far from proving anything, but can be an interesting though for future research. 

The aggregate demand 2007-2009 shock and the impact of technology 

In an earlier text back in January, I covered a part of this topic as a reaction to the 'iPhone causing a loss of work' story in the New York Times. The story that got everyone worked up was that Apple's iPhone production being outsourced to China was causing a loss of manufacturing jobs in the US. In this case, a development of a new technology (not even a development, but rather an update, or whatever we wish to call it), caused a shift of jobs from the US to China. This was only one case in point, as many industries decided to switch production in the past decade due to a new shift in supply chains, and outsource a lot of business to Asia. 

As a result this made a lot of home workers redundant (both European and US), but there was no consequential job losses to follow, i.e. the Western companies failed to adjust their demand for labour back home. As the crisis struck, revenues decreased and it became to costly to keep all these excess workers employed. But the onset of the labour market crisis was a natural transition in the patterns of labour specialization where a range of constraints (mostly political) were holding back the restructuring in the labour market. In particular they were holding back the process of rediscovering new skills and new ways to create and sustain value. They were holding back the switch towards new technologies. Have in mind that prior to 2000s, only businessmen, bankers and diplomats had cellphones and laptops, the internet wasn't as nearly developed and used as it is today, and information was relatively scare (compared to today). Now we have a vast availability of information and a variety of new technologies at our disposal. This isn't just stuff for personal use (like ipods or smartphones), but for business use as well. Using outdated equipment meant facing bankruptcy. Using newer equipment meant a better way to create more value with less input (thus defying the central law of scarcity in economics). Sure this would cause an initial decrease of employment, but those workers would have been quickly rearranged into new productive sectors. A transition such as this usually takes up to a couple of decades, but in the midst of the recent crisis it developed rather quickly.

London's big shift 

An example in recent history always brings me back to the case of London and the UK. London (or the UK) was once a bearer of a proud and strong shipping industry (among other manufacturing industries), but got completely restructured into a world financial giant. What was once shipping and mining is now finance, forex trading, and insurance. The initial effect that made the change was technology. The significant development of the IT industry to support high-frequency trading and financial services made it possible for London to take advantage of this and position itself as a global leader (even though the UK wasn't the economic powerhouse of the world anymore). 

Think of the effect of this change on the labour market. Initially, after closing shipyards and mining mills, a lot of workers got redundant and lost their jobs. But after a while they changed occupations and moved to different careers, even though they probably never got over the fact that their industries were destroyed. Think of how this affected their children in the long run. Instead of working in a shipyard, the children had an opportunity to get a good education and move to a new industry - finance. Think of the significant increase of personal wealth this brought to the average family. And think of the significant impact on newly created wealth for the UK as a whole. Closing inefficient industries (or better yet, stopping to support them), opened up room for a range of other, better, higher-paying industries. No one can predict where the patterns of new specialization will end up, but provided that they are left without external interference  they are very likely to produce a much more efficient and sustainable outcome. 
It is also interesting to note how a restructuring of UK's and London's industrial advantage didn't come without significant resistance from those affected. Unions went on strikes to oppose these changes but the changes were made and more importantly, they were irreversible. Even though the unions and their members will never admit this was good for the UK economy, they too have been affected in positive ways and were offered better lifestyles and more wealth than before. 

This is why we need to let the labour market readjust, not constrain it with burdensome regulation. As Rogoff said, in Europe this is apparently much harder to do due to its existing constraints. In the US, it should have been much simpler, but it isn't (as you may recall from here). The question is who is constraining the US labour market from recovering and restructuring? 


  1. Although I agree with your conclusions we cannot gloss over the fact that jobs didn't just change offering new opportunities to the blue collar workers in the UK. What happened is that those with good educations did very well, while a much larger group became the permanently un- or underemployed "chaves".

    The same is happening everywhere. Only by promoting small business creation, lower taxes and regulations, will there be jobs available for most of these displaced people. The majority of them will not simply get high tech jobs in big corporations.

    1. that is true, the new technologies are offering new jobs primarily to highly educated individuals, but it has always been like that. Those with a better education were the first to take advantage over a new technology, while the rest adjusted later after the net effect of the new technology became visible.
      The bottom line is exactly what Rogoff said: "the market has a way of transforming jobs and opportunities in ways that no one can predict."

  2. You raised some excellent points, but the graph depicting the inverted relationship between technology and unemployment seems implausible to me. First of all this isn’t a good proxy for technology, it only measures value of inventories. Second, since it measures only a value of inventories it makes sense that it moves in opposite directions to unemployment. I don’t see how we can measure technology precisely in a way that we can compare it to variables like unemployment. Even if it is used as an index comprised of a few variables I would still see it troublesome to make comparisons with.

    1. I know, that's why I pointed out that the graph is far from proving anything, but simply offers an interesting thought.
      However, I do think it's a good proxy, even though you rightly pointed to a possibility of autocorrelation as inventories make it a cyclical variable. It's a good proxy since it shows the increasing importance of technology through the increasing values used by the IT industry. It's not precise, nor perfect, but that's what makes it a proxy

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  6. What does "technology" in the first graph and "total inventories in IT industries" mean. How would you define technology in you own words?

    1. The first term is defined in the text from which I took the graph:

      The second graph measuring total inventories in the IT industry represents a proxy for investments in technology. You can also check the precise definition on the FRED website. It basically refers to exposure to new technologies measured in quantities and value of both hardware and software.