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Technology – a friend or foe?

    Vuk Vukovic, lecturer of Political Economy and Principles of Economics at the Department of Economics, Zagreb School of Economics and Management (ZSEM), writes on the impact of technology on labour. 

    Ever since Ned Ludd and the Luddites, and their 19th century “rage against the machine”, there has been a persistent notion that technological growth and advancement causes higher rates of unemployment.

    But the accumulated effect of the industrial age has brought nothing but rising living standards to the majority of the world’s population. Both in absolute and relative terms, people live longer and healthier, work less, and earn more. It is true that initial shocks gave brief rises to periods of higher unemployment but even in the short run this structural unemployment was quickly reallocated to new, rising industries. Even when these new industries created a whole new demand for skills, this demand was quickly filled up by eager workers.

    So has been the case with the newest industrial revolution currently under way. 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.

    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. 












    Newspapers are another good example:

    The rise of New York Times and the Wall Street Journal circulation is attributed solely to their increase in online subscriptions and readers. In fact the NYT currently has more online than print subscribers. They offer a good example of how to adapt to a new generation of readers using new technologies to access information. It is also another good example of how it takes an exogenous shock like the crisis to realise that something needs to be done to respond to the new demand. On the other hand USA Today and the LA Times failed to adapt to the new technological patterns and have experienced a consequential drop in circulation.

    The reaction of the newspapers clearly shows the pattern of adaptation to new technological shocks. At first most are reluctant to do it, and the change is often adapted only by small enthusiastic entrepreneurs, but as time goes by and the previous model proves to be unsustainable, big players are forced to adapt to the changing environment. Very often the trigger for them to do so is an exogenous shock. In recent terms it was the 2007-2009 financial crisis which is signaling that the former growth model was highly unsustainable and needs to be altered.

    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. 

    Vuk Vukovic is a lecturer at the Department of Economics, Zagreb School of Economics and Management (ZSEM).

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