New technologies of various kinds, together withglobalization, are powerfully affecting the range of employment options forindividuals in advanced and developing countries alike – and at various levelsof education. Technological innovations are not only reducing the number ofroutine jobs, but also causing changes in global supply chains and networksthat result in the relocation of routine jobs – and, increasingly, non-routinejobs at multiple skill levels – in the tradable sector of many economies.
How, then, should policymakers confront the new anddifficult challenges for employment (and, in turn, for the distribution ofincome and wealth), especially in developed economies? From recent research, wehave learned a number of interesting things about how the evolution of economicstructure affects employment.
The tradable side of advanced economies has not generatedany real net increases in employment for at least two decades, while the jobsthat it has created are concentrated in theupper-income and upper-education ranges, with employment declining inthe middle and lower range of income and education. Growth in high-end servicesemployment is matched by contraction in high-employment components ofmanufacturing supply chains.
Until the crisis of 2008, middle- and lower-income jobgrowth occurred entirely in the non-tradable sector of the economy, whichaccounts for roughly two-thirds of advanced countries’ output and employment.Here, incomes and value added per employee remained largely flat. Jobs could beeliminated by technology, but not by global competition; and, unsustainable,debt-fueled domestic-demand growth helped to delay the current employmentdeficits.
As a result, the advanced economies have been shedding routine jobs at a rapid rate, while addingnon-routine jobs (for example, those that cannot yet be replaced or reduced bymachines and networked computers). This has fueled a dramatic rise in thereturn on education and high-level skills, with the share of total incomereceived by owners of capital and high-end employees increasing in advancedcountries for more than two decades.
Growth and employment are thus divergingin advanced countries. The key force driving this trend – technology – isplaying multiple roles. The replacement of routine manual jobs by machines androbots is a powerful, continuing, and perhaps accelerating trend inmanufacturing and logistics, while networks of computers are replacing routinewhite-collar jobs in information processing.
Part of this is pure automation. Another important part is disintermediation – the elimination of intermediaries in banking, online retail, and a hostof government services, to name just a few affected areas.
But technology’s impact does not stop there. The same classof information technologies that automate, disintermediate,and reduce the costs of remoteness are also enabling the construction ofincreasingly complex and geographically diverse global supply chains andnetworks.
Global supply chains – constantly in flux, owing to rising developing-country incomes andshifting comparative advantage – locate productive activities where human andother resources make those activities competitive. Links in these chainsinclude not only intermediate products and assembly, but also a growing rangeof services – research and development, design, maintenance and support,customer service, business processes, and more – as transaction, coordination,and communication costs fall.
The result is what is sometimes called the “atomization” of global supply chains: increasinglyfine subdivisions are feasible, more efficient,and locatable almost anywhere. Proximity stillmatters in terms of transport and logistics costs. But, with the developingworld accounting for the largest new markets and most of the growth in globaldemand, the logic driving atomization shouldbecome even more compelling.
The efficient ongoing decompositionof global supply chains, networks, and services has two related consequences.First, the tradable part of the global economy – where competition for economicactivity and jobs is direct – is becoming a larger share of the whole; the sameis true of individual economies. Second, parts of global supply chains thatwere not competitive are no longer protected by being adjacentto parts that were. Adjacency is no longer arequirement.
These dynamics and related challenges are not confined toadvanced countries. Over the next decade, for example, China will replace muchof its labor-intensive assembly employment with higher-value-added employmentin manufacturing and services, not only in the tradable sector, but also – evenmore noticeably – in the rapidly growing non-tradable part of its economy. Theexpanding scope and diminishing costs of automation and additive manufacturingmay affect labor-intensive functions globally, including in earlier-stagedeveloping countries.
A key factor in adapting to these forces is investment. Forindividuals, businesses, educational institutions, and governments in advancedcountries, broad-based, elevated, and efficientinvestment in education and skills is critical. Closing wide information gapsin the market for skills would also increase the efficiency of theseinvestments.
Across-the-boardupgrading of human capital will improve income distribution both directly andindirectly (by reducing the supply of lower-skill workers relative to demand).It will also (partly) mitigate the concentration of wealth that results from ahighly skewed income distribution.
On the tradable side, competitiveness depends not only onhuman capital, but also on a host of other factors: infrastructure, taxsystems, regulatory efficiency, policy-induced uncertainty, and energy andhealth-care costs.
There is no guarantee that taking the right steps in theseareas would entirely overcome the employment challenges that individuals andcountries face, though doing so would help. In fact, it is possible that we areentering a period in which major adaptations in employment models, work weeks,contract labor, minimum wages, and the delivery of essential public serviceswill be needed in order to maintain social cohesionand uphold the core values of equity and intergenerational mobility.