The information revolution requires a new social contract between the state, firms and workers.
In his final State of the Union address, US President Barack Obama spoke of an America being buffeted by rapid technological change. His message was clear: The world is changing fast and the US better change with it.
But if Americans have the audacity to hope that economic security is a God-given right, they’re wrong. Government can help people to adapt to these changes, but only if they view them as an opportunity rather than a threat. (Translation: If they choose to vote for Hillary Clinton instead of Donald Trump.) Unfortunately, for those of us who dislike Trump, history teaches us that fear is the natural human response to these periods of extraordinary change.
In the early 19th century, Britain—the world’s superpower—found itself on the cusp of a period of rapid technological change. The Industrial Revolution, which would bring great prosperity, was greeted with social unrest. A group of workers marauded across English towns destroying machines and intimidating factory owners. Known as the Luddites, they believed that technological change posed a threat to their livelihoods.
Less Work for Us?
They have not been judged well. The word “luddite” has entered our language as a disparaging term for those who are afraid of smartphones, and economists have made short shrift of those who think technological change poses a genuine threat to employment. If you talk to an economist about how a new invention is going to put you out of a job, you will probably hear them grumble about the “lump of labor fallacy.” Other than being the kind of ugly phrase that explains why no one likes economists, this is supposed to tell us why new technology will not cause an increase in unemployment.
The mistake comes from thinking that there is a set amount of work to be done in the economy. If that’s the case, when machines help us do something more efficiently, then it is natural to think that there will be less work for us to do. This leads us to the conclusion that it will not be long before we find ourselves grasping our résumé in the queue at the nearest job center.
But the economy is dynamic, not static. The amount we produce affects the amount we consume. In the past, changes in technology tended to help us to produce more and produce better, and this created higher demand in the economy. This, in turn, should increase the overall level of demand for our labor.
Witness, for instance, the changes in the structure of the UK jobs market since 1700. At the beginning of the 18th century, around 50% of people worked in agriculture, and by 2011, this had fallen to less than 1%. The changes that made agricultural production more efficient have not left us with a permanent pool of unemployed workers. Instead, people have found jobs in different sectors of the economy.
Race Against the Machine
But there are two things worth noting about this argument dismissing the threat of technological change. First, there is nothing to say that the distribution of the demand for our labor will be equal. The rewards from the technological change will not necessarily accrue evenly across the economy. They are likely to be skewed toward those who best complement the work of the machines that help us to produce more efficiently. Second, even though in the past we have observed that machines have not destroyed jobs, there is reason to believe things might be different this time.
In Race Against the Machine, two MIT professors, Erik Brynjolfsson and Andrew McAfee, argue that technological change has already reshaped the way we work with profound implications for the structure of our society. Over the past 25 years, there has been extraordinary growth in the processing power of computers and advances in robotics. These changes have helped us to work more productively.
But this information revolution has had casualties. As information technology (IT) has become less expensive, employers have started substituting employees for IT whenever they can. The victims tend to lie in the middle of the income spectrum: the foreman, the bank clerk and the bookkeeper. These jobs involve routine and uniform action or analysis that is easily replicated by machines.
As these workers have been displaced, the jobs market has become more and more polarized. The displaced workers have been pushed toward the bottom ends of the income spectrum. In particular, they are taking on the many low-skilled but non-routine manual tasks that would be challenging to replicate with machines. It is not easy to automate the job of the security guard who needs to respond to a wide range of unpredictable scenarios or the gardener whose job requires considerable manual dexterity.
Economists have documented the growth in these types of jobs alongside the decline in middle-income professions. At the other end of the spectrum, there are those whose skills complement the work of machines. The new technology offered by computers and robotics favors those who can undertake abstract, data-driven reasoning and utilize this new technology effectively. We are living in an age where the rewards from technological change accrue disproportionately to those with high levels of education or technical ability. Meanwhile, those in the middle of the income distribution are pushed toward low-paid and low-skilled work.
These changes have caused an acceleration of inequality in developed countries. The technological advances that have heightened inequality have also weakened the capacity of the state to redistribute resources. This frustrates the most obvious solution to correct the increasing gap between the rich and poor—soaking the rich. Technological advances have made individuals and companies much more mobile. This diminishes the capacity of the state to extract resources from firms and its wealthiest citizens. Those in power find themselves in a bind—under pressure to tackle inequality from those with stagnant and falling incomes, but facing a gambit from those at the top as they threaten to leave.
The Human Factor
The picture is complicated by a general public who tends to state that inequality is too high but opposes increases in taxes. Other indirect options to promote equality, such as raising the minimum wage, are more popular. But they are more likely to have damaging effects, such as increasing unemployment.
All of this seems to point to something like the Third Way solution. That is, trying to use the proceeds of growth to fund the provision of high quality public services, while subsidizing low-income employment through tax credits. However, as the experience of the 1990s shows, this does little to reduce inequality. It will also be harder to build this kind of political consensus around this platform with an electorate who are experiencing stagnant or falling incomes.
A second shift is the growth of new and different ways of working. The rise of the so-called sharing economy poses profound challenges for the traditional relationship between workers, the state and firms. The praetorian guard of the sharing economy—Uber, Lyft, TaskRabbit—act as a group of online middlemen. For instance, Uber tries to connect people with a few spare hours and a driving license with those who need a cheap ride. This means that Uber drivers are not technically employees. Rather, they are independent contractors and Uber is just a platform for them to publicize their business. These types of companies bring extraordinary benefits. They help us to use our resources more efficiently and provide many people with the opportunity to work flexibly.
But this kind of piecemeal working creates new challenges. In a world where workers have two, three or four employers, there is no single company responsible for providing benefits. The lack of a single employer erodes key worker’s rights such as health insurance, pensions, overtime pay and paid vacation as no company is responsible for their provision. This leaves employees facing much higher levels of insecurity.
These changes in the patterns of employment require a radical overhaul in the administration of benefits. There are two key changes required to accommodate this new, polygamous relationship between employees and employers.
The first is the proration of benefits. This means that employers should pay benefits on an hourly basis and that there should be no minimum threshold before which an employer is obliged to pay benefits. This removes the perverse incentive for employers to move employees into part-time work to avoid responsibility for the provision of benefits. This is not a new idea. Indeed, a number of benefits, such as Medicare, are already prorated.
The second is the need to make a benefits account that is portable. This would make sure that the benefits accrued with one employer can be redeemed with another. Otherwise, in a world where people rapidly cycle through jobs, employees would have very limited opportunities to enjoy their benefits.
The world is changing. Governments and companies are right to celebrate innovation. But they ought to be mindful of the way these changes disrupt the lives of citizens. President Obama is right to say that Americans should view these changes as an opportunity, not a threat.
But it is understandable that perspective is difficult to find when technology is distributing opportunity so unequally and threatening the economic security provided by worker’s benefits. One of the biggest challenges facing the next US president will be to redraw the rules that determine the way we live and work together to prevent opportunity and security falling victim to the information revolution.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.