CPS: "Technology - a friend or foe"

A new text of mine gets published at the Centre for Policy Studies blog, entitled "Technology - a friend or foe". For all my CPS writings see here.

The text is about the joint effect of the third industrial revolution and the recent crisis on the restructuring of the labour market in the West. It's premise is that companies failed to adjust to the pre-crisis technological changes due to a range of (mostly political) constraints and other market rigidities. After the onset of the crisis abrupt restructuring of the labour market took place. The crisis was a trigger point for the companies to apply the necessary adjustments. This theory is similar to the logical conclusions of the PSST theory devised by Arnold Kling, and referred to in a previous text on the fiscal stimulus. 

Here's an excerpt, but you can read the whole text here:

"...The so-called third industrial revolution, or the IT revolution, manifested during the last 20 years. However during the pre-crisis decade it supposedly had a negative impact on the jobs market through the digitalisation of jobs and their outsourcing to Asia. 

We may interpret the outsourcing of jobs to Asia as one potential indirect effect, but it is more likely that this shift of jobs was due to globalisation, new supply chains, and the law of comparative advantage. Some countries specialise in manufacturing and labour-intense technologies, while others, where this is too expensive to support, switch to services. This is a natural transition in which the emerging economies are becoming leading manufacturers, while leading nations such as the US and the UK are switching to financial services, IT industry, higher education and science. 

In the pre-crisis decade due to the outsourcing effect and the digitalisation of jobs, many workers in manufacturing industries in the West became redundant, but there were no consequential job losses due to ongoing market rigidities, political protection of certain industries and the non-responsiveness of companies. Western companies simply failed to adjust their demand for labour. The crisis resulted in increasing costs and declining revenues forcing companies to rationalise their existing labour stock through many lay-offs. It became too costly to keep all the excess workers employed. The inadequate adjustment of companies to the technological changes in pre-crisis times is one of the reasons behind a slow labour market recovery today. The lost jobs won’t be coming back, and those who lost them are forced to re-specialise or face long-term unemployment. A transition and restructuring of the labour market demand usually lasts up to a couple of decades, but in the midst of the recent crisis it developed rather quickly."

I would add here that even though a new trend of insourcing is currently under way, where certain US companies are bringing 'jobs back home' as a reaction to increasing transportation costs and wages in China, this effect still isn't fully visible or measurable. This also means that outsourcing wasn't caused by the technology shock, but by the law of competitive advantage (among other things). The technology shock had a different impact on the labour market. 

"The visible impact of technology 

Holding back the adjustment to the current technological change will make it even harder to adapt to the rapidly forthcoming technological shock. The internet is already revolutionizing education (see Marginal Revolution University) and making it more affordable, and 3D printing has the potential to completely revolutionize manufacturing to the point where we won’t need factories any more. This is a clear signal to all those currently employed in manufacturing to enhance their skills and re-specialize (a recent New York Times article described the necessary re-specialization of factory workers into a “hybrid of an old-school machinist and a computer programmer”). Also this is a clear signal to developing nations that their manufacturing advantage won’t last as long as they hope, and that they too should examine the possibilities to use the currently gained income to invest into education and skills. 

Other changes will improve our lifestyles. The use of biotechnology and nanotechnology could change the entire health industry. There is a big technological impact on agriculture and aqua plants which will increase the food supply, thereby (potentially) reducing the protection to old-style farmers. Energy is ready for its biggest shift yet, with shale gas and a plethora of other alternatives significantly decreasing energy costs.

Even in economic policy decision-making the use of technology can be of much help. The Economist demonstrated using a Google search engine to count words like “job” or “benefits” which are closely correlated to the unemployment rate (see graph), can develop indexes which offer a more realistic and up-to-date picture on the real economy than we can get from measures like the unemployment rate or GDP, making it easier for policymakers to react more quickly." 

More good examples here are the adjustment of US newspapers in terms of online subscriptions, or the historical restructuring of industries and jobs in London and the UK in the 1980s and 1990s. 

The text ends with a paragraph on the resistance to change: 

"Changes in technology naturally result in strong resistance since it’s hard to convince workers that their jobs are inefficient, obsolete and unnecessary; at least for the price they are prepared to offer. This is why the creative destruction is necessary to enable a faster shift from inefficient to efficient jobs (i.e. enable a faster trial and error process) and which won’t be constrained by political interference. Politics is always in a way an impediment to technological progress, since new technologies deliver changes in social patterns. For short-termist, office-oriented politicians, these types of changes are a natural enemy and they will do anything to prevent them and prove to the people that they do care about preserving old jobs.  

The restructuring on the labour market was necessary since it allowed the market to discover new production techniques. And despite the fact that a technological shift will always result in changing the structure of jobs in the economy and lead to the abolition of old jobs, the focus should be on new types of jobs being created as a result, and whether or not this is done without any external interference."