Innovation
Davos 2014: Google chief says jobs problem will be "the defining one" for next 20/ 30 years
By Michael Hennigan, Finfacts founder and editor
Jan 24, 2014 - 9:27 AM

Davos 2014: Eric Schmidt, executive chairman of Google, warned on Thursday at the annual meeting of the World Economic Forum in Switzerland, that a large range of jobs that once seemed beyond the reach of automation are in danger of being wiped out by technological advances.

He said that with the constant development of new technology, more and more middle class workers would lose their jobs.

“The race is between computers and people and the people need to win,” he said. “I am clearly on that side. In this fight, it is very important that we find the things that humans are really good at.”

There is an enormous amount of innovation happening, and it would be an economic mistake to delay adopting efficient new technologies and he pointed out that, on a net basis, more jobs were created by small companies and therefore entrepreneurs needed more support otherwise the situation would get worse.

"It's clear to me that we can get full employment, but wages are still depressed," Schmidt told the forum.

"As more routine tasks are automated, this will lead to much more part-time work in caring and creative industries. The classic 9-5 job will be redefined," he said.

While the peril ahead for the middle classes is an important issue to debate, a cynic might say that concern for the middle classes when Google and other tech giants are lobbying the OECD in Paris for the retention of the system that enables them to pay very low corporate taxes reflects hypocrisy.

Governments will need to ramp up spending on education and training in response to the anticipated society-impacting changes ahead.   

Neelie Kroes, European Commission technology commissioner, said this week: "Europe has a jobs problem. A shortage of jobs is a pending social disaster and a brake on competitiveness.

Some have pointed the finger at technology, as efficient ICT systems make a range of low-skill jobs obsolete or cheaper to perform elsewhere. But far from being the problem, technology could be the answer we’re looking for. Overall an economy’s investment in ICT will generate twice as many jobs as it eliminates. Take as an example the 800,000 new jobs in the app economy - - an entirely new industry -- in the last five years, 300,000 of them as software developers.

These ups and downs of technology matter. There is no clearer contrast than today’s 12% unemployment rates across the Eurozone and the hundreds of thousands of ICT-related vacancies (among the 2m unfilled positions across Europe)."

The Reality Check for Kroes is that most workers in the app sector are part of the freelance economy with a small few winners and most developers scratching for a living.

As for the millions of unfilled tech jobs, she seems to have bought the industry's hype.

According to a Congressional Research Service Report: " Almost two-thirds of the 9.3m people in the US labour market who had STEM (science, technology, engineering, or mathematics) degrees in 2010 were employed in non-STEM occupations."

Google itself is engaged in developing automation technology including a driverless car.

“There is quite a bit of research that middle class jobs that are relatively highly skilled are being automated out,” Eric Schmidt said. "The auto industry was an example of robots being able to produce higher quality products," he added.

New technologies were creating “lots of part-time work and growth in caring and creative industries . . .the problem is that the middle class jobs are being replaced by service jobs,” he said and added that governments needed to invest in education systems to improve skill levels and human cognition. “It is pretty clear that work is changing and the classic nine to five job is going to have to be redefined,” he said. “Without significant encouragement, this will get worse and worse.”

Boom in personal care aide jobs

Occupations and industries related to healthcare are forecast to add the most new jobs in the US between 2012 and 2022 while total employment is projected to increase 10.8%, or 15.6m, during the decade.

The Bureau of Labor Statistics says personal-care aides requires no formal education, but most aides have a high school diploma. Workers in the field earned an average annual income of $19,910. “As the baby-boom population ages, there will be an increase in the number of clients requiring assistance,” the BLS said.

The most job openings, due to both growth in the sector and employee turnover, will come for workers in retail sales and food and beverage service. Average income in those fields is less than $20,000 per year.

Big employers are getting scarce

General Motors had over 618,000 employed in the US in 1979 - - in well-paid jobs; today, General Electric employs 133,000 and Apple 47,000. The US needs to add about 90,000 new jobs monthly to just meet the natural growth of the workforce.

The United States now has very few large factories: of more than 295,000 manufacturing establishments counted by the Census Bureau in March 2011, only 815 employed more than 1,000 workers. The reported number increased slightly in 2011, marking the first time since at least 1998 that the number of large plants has shown an uptick. There were 1,504 in 1998.

Although manufacturing has been losing importance as a share of GDP during the last three decades, it remains an important sector of the US economy. It accounts for about 75% of private sector R&D investment, represents more than 50% of export earnings, and provides for most high-wage jobs, especially for blue-collar workers.

Robert Samuelson, Washington Post columnist, wrote last April: "Measured by jobs, the fall has been deep and persistent. From 1973 to 2010, manufacturing’s share of total non-farm US employment has dropped from 25% to 10%. The recent decline has been particularly severe, with more than 5m jobs disappearing since 2000..From 1973 to 2010, manufacturing’s proportion of employment fell from 22% to 10% in Canada; from 37% to 21% in Germany; from 23% to 9% in Australia; from 28% to 17% in Japan; and from 29% to 13% in France.

In the period 1990-2008, almost all the additional increase in US employment was in the non-tradeable sector led by government and health care.

According to a paper by Prof Michael Spence, a Nobel laureate in economics, and Sandile Hlatshwayo, a researcher at the Stern School of Business, New York University, almost all of the incremental employment increase of 27.3m jobs was on the non-tradeable side. On the non-tradeable side, government and health care are the largest employers and provided the largest increments (an additional 10.4m jobs) over the past two decades.

Ireland had a similar experience in the period 1998-2007 when over 400,000 new jobs were added in construction, public services, non-tradeable business services, retail and distribution but a tiny amount was added in the tradeable goods and services sectors, which comprise the bulk of exporting trade.

The Spence/Hlatshwayo paper says that the US economy did not have a conspicuous unemployment problem until the crisis of 2008 because the non-tradeable sector absorbed the bulk of the expanding labour force. That pace of employment growth now appears unsustainable. Fiscal weakness, a resetting of real-estate values, and lower consumption all point to the potential for long-term structural unemployment.

The economists say that in terms of economic value-added  - - the output of the economy that is measured by GDP and generally correlates with income - - the tradeable sector experienced a slight edge.

The authors say that companies in the tradeable sector, under the pressure of global competition, are moving low- and mid-skilled work to other countries while the higher-skilled Americans who remain in those firms share in the benefits of that shift through wages and salaries that started higher and have been growing faster.

In the non-tradeable sector, the story is one of rapidly rising employment but a slow rise in output, which has resulted in stagnant wages and benefits.

The economists say that "while many goods and services are less expensive than they would be if the country were walled off from the global economy, we cannot assume that these cost savings necessarily compensate for diminished employment opportunities. People might trade away cheaper goods for assurances that a wide range of productive and rewarding employment options would be available, now and in the future."

They add that high value-added, higher-paying jobs, especially in the tradeable sector, generally require highly educated people. More and better education does not by itself guarantee that the number of such jobs is significantly expandable, given the scope of the tradeable sector. But more scientific and engineering degrees might promote job growth and - - together with some public-sector investment in promising technologies - - it might also expand the scope of the tradeable sector as well.

However, they say private incentives and social objectives are not perfectly aligned. Nor are they diametrically opposed either. Multinational firms have access to abundant global supplies of relatively low-cost labour in multiple skill categories, so there is not much payoff to investments that increase labour productivity in high-income countries’ tradeable sectors. Public-sector co-investment properly targeted, however, could shift these incentives by lowering the cost of private technology investment.

The paper says given the prospect of slowing employment growth in non-tradeables and rising competitive pressure on tradeables, major employment problems in the near future are a certainty. Even if the non-tradeable sector is able to continue to absorb the growth in the labour force, pressure on wages and salaries will be downward, and consequences for income distribution unavoidable.

The authors conclude that if employment in advanced countries like the US recovers strongly along with growth, political support for an open global economy will be easier to sustain. But, given adverse trends in the tradeable sector and the non-tradeable sector’s exhaustion as a source of job creation, a more likely scenario is that unemployment remains stubbornly high, despite a return of normal growth. In that case, politics will become divisive and polarized, and the inclination toward protectionist “solutions” will increase, jeopardizing global economic openness.

They says: "It is not a good idea to assume that markets will solve these distributional problems by themselves; the evolution of structure and the income distribution are largely the result of market incentives. All countries, advanced and emerging, have to address issues of inclusiveness, distribution, and equity as part of the core of their growth and development strategies."

The economists say that the late renowned American economist, Paul Samuelson, once said that every good cause is worth some inefficiency. "Morally, pragmatically, and politically, he was right."

At a 2013 forum in San Francisco, Erik Brynjolfsson, a professor at MIT's Sloan School of Management and director of the MIT (Massachusetts Institute of Technology) Center for Digital Business said: "Technology doesn't automatically lift the fortunes of all people. It's something of a paradox. Profits have never been higher, innovation is roaring along, GDP is high, but job creation is lagging terribly, and the share of profits going to labor is at a 60-year low. This is one of the most important issues facing our society."

Citing the work of economist Joseph Schumpeter, the late Austrian -born economist, Brynjolfsson noted that technology has historically provided "creative destruction" for an economy, causing some jobs to disappear while bringing others into existence. "But the last 10 years have been different. Technology simply hasn't been creating jobs as it did before."

It's a double-barreled effect, Brynjolfsson added. Not only are today's technology companies creating fewer jobs, but the products they make, notably computerized automation equipment, often lead to further job losses in other parts of the economy. These second-effect job losses are further encouraged by off-shoring and by the declining power of labour unions.

Enrico Moretti, an economics professor at the University of California, Berkeley, said that the average tech position creates five additional jobs in various support industries, from doctors to hairdressers to dog walkers. However, the "multiplier effect" for manufacturing jobs is much lower: 1.6 instead of 5. Much of that, he added, was simply the result of the higher wages generally paid by tech jobs.

Working as a 'dog walker' is unlikely to be a stable full-time job and if it is, the pay would likely be low.

In 2012 at the Aspen Ideas Festival, Alan Krueger, then chairman of the White House Council of Economic Advisers, stressed the challenge of adding jobs in the economy:

If you look at the decade before the recession, the US economy was not creating enough jobs, particularly not enough middle class jobs, and we were losing manufacturing jobs at an alarming rate even before the recession. And I would also put together, combined with those two problems, the polarization of the US job market, the fact that we are getting more and more people at the very top and the very bottom and the middle has been shrinking."

On his blog, Andrew McAfee, an MIT colleague of  Erik Brynjolfsson, explains the graphic above:

Since the Great Recession officially ended in June of 2009 GDP, equipment investment, and total corporate profits have rebounded, and are now at their all-time highs. The employment ratio, meanwhile, has only shrunk and is now at its lowest level since the early 1980s when women had not yet entered the workforce in significant numbers. So current labor force woes are not because the economy isn’t growing, and they’re not because companies aren’t making money or spending money on equipment. They’re because these trends have become increasingly decoupled from hiring — from needing more human workers. As computers race ahead, acquiring more and more skills in pattern matching, communication, perception, and so on, I expect that this decoupling will continue, and maybe even accelerate."

In a videotaped interview on Bloomberg News, Brynjolfsson was more cautious:

I have to be brutally honest, I don’t think Andy and I are sure whether it’s different this time around. If you look at the data, this time it seems to be a lot more difficult. So it’s possible we are facing a regime change, a fundamental change in the way technology and employment interact with each other."

McAfee and Brynjolfsson have authored a book 'Race against the machine' and the Economist's Free Exchange blog commented:

The first thing to understand about ICT is that it is a general purpose technology, like electricity, with the ability to dramatically change business models and boost productivity across many different sectors. The second critical detail is the deceptively rapid pace of technological change. The authors note that when technologies improve in a Moore's Law-like fashion, doubling in power at relatively high frequencies, the huge scale of potential change sneaks up on you. The first few doublings—1 to 2, 16 to 32—seem unremarkable. By the 50th doubling, when you're going from 563 trillion to 1.1 quadrillion, the pace of progress seems almost magical. In this way, developments that seemed impossible a few years ago, like fully autonomous cars and high-quality computerized translation, are now realities, or soon will be. And there's good reason to think that ICT is just getting warmed up.

The book does a good job describing how these developments have played out. Many companies beginning to discover ways to exploit better technology, in ways that often lead to displacement of existing workers (think of the growing ubiquity of self-checkout at drug and grocery stores). A few have become phenomenally successful. Some have done so by discovering profitable new businesses and business models (think of Facebook and Amazon), while others enjoy the fruits of the superstar effect, in which the digitisation of information allows top performers to capture much larger markets than was previously possible. (And of course, ICT also makes it easier for low-cost labour outside the rich world to compete with rich-world workers.) What hasn't happened swiftly enough, unfortunately, is the creation of new businesses, at a pace fast enough to employ the people displaced by new technology."

James Hamilton, an economist at the University of California, San Diego, challenged the 'Race Against The Machine' thesis and told The New York Times:

I am very skeptical of the claim that technology itself is the problem. In 2005, the average US worker could produce what would have required 2 people to do in 1970, what would have required 4 people in 1940, and would have required 6 people in 1910. The result of this technological progress was not higher unemployment, but instead rising real wages. The evidence from the last two centuries is unambiguous — productivity gains lead to more wealth, not poverty. The unemployment since 2007 was not caused by gains in productivity or increased automation, but instead by loss of demand for the product that the workers had been producing, for example, a plunge in the demand for new home construction."

Brynjolfsson and McAfee outline a list of 19 proposals that they support - - which range from massive investment in education, infrastructure and basic research, to lowering barriers to business creation, eliminating the mortgage interest deduction and changing copyright and patent law to encourage new (as opposed to protecting old) innovations.

Any effort to counter the damaging consequences to the employment marketplace stemming from technological innovation, according to Brynjolfsson, requires substantial government action at a time when “the political system is the most dysfunctional part of our society.”

Book Excerpts in The Atlantic:

http://www.theatlantic.com/business/archive/2011/10/where-human-workers-can-still-beat-robots-at-least-for-now/247259/

http://www.theatlantic.com/business/archive/2011/10/why-the-massive-wealth-of-the-1-could-ruin-the-economy/247277/

http://www.theatlantic.com/business/archive/2011/10/why-workers-are-losing-the-war-against-machines/247278/

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