I recently found myself talking about my favourite TV shows from my childhood. Smurfs aside, the most popular one for me (and I suppose for many other people from my generation) had to be Knight Rider. It was a story about a crime fighter (David Hasselhoff) and his a heavily modified, artificially intelligent Pontiac Firebird. ‘Kitt’ was a car that could drive itself, engage in thoughtful and articulate conversations, carry out missions and (of course) come up with solutions to complex problems! A car that was very far from what was technologically possible in the 80s – and this was part of its charm.
Today this technology is becoming reality. Google, Tesla and most major automakers are testing self-driving cars with many advanced features like Kitt’s – if not better. They may not fire rockets, but they can drive themselves; they can search the internet; they can answer questions in a language of your choice; and they can be potentially integrated with a number of other technologies (such as car sharing apps) to revolutionise the way we own and use our cars. It will take years until we are able to purchase and use a self-driving car – but it appears very likely that this technology is going to become roadworthy within our lifetime.
Artificial intelligence (AI) is already becoming part of our life. You can buy a robotic vacuum cleaner online for less than a £1000. You can get gadgets like Amazon’s Alexa, that can help you automate your supermarket shopping, for instance. If you are Saudi, you can boast that you are compatriots with a humanoid: Saudi Arabia was the first country to grant citizenship to Sophia, an impressive humanoid and apparently a notorious conversationalist who does not miss an opportunity to address a large audience – and it has done so numerous times already in technology fairs, national congresses – even the UN Assembly! Sophia is the first robot to be honoured with a UN title!
What will be the impact of such technologies on labour markets? If cars can drive themselves, what is going to happen to the taxi drivers? Or the domestic housekeepers – who may find themselves increasingly displaced by cleaning robots. Or warehouse workers who may find themselves displaced by delivery bots (did you know that Alibaba, the Chinese equivalent of eBay, owns a warehouse where most of the work is carried out by robots?). There is no doubt that labour markets are bound to change. But should we (the human labour force) be worried about it? Acemoglu et al (2017) think that we should:
Using a model in which robots compete against human labor in the production of different tasks, we show that robots may reduce employment and wages […] According to our estimates, one more robot per thousand workers reduces the employment to population ratio by about 0.18–0.34 percentage points and wages by 0.25–0.5 per cent.
Automation is likely to affect unskilled workers more than skilled ones, as unskilled jobs are the easiest ones to automate. This could have widespread social implications, as it might widen the divide between the poor (who are more likely to have unskilled jobs) and the affluent (who are more likely to own AI technologies). As mentioned in a recent Boston Consulting Group report (see below):
The future of work is likely to involve large structural changes to the labour market and potentially a net loss of jobs, mostly in routine occupations. An estimated 15 million UK jobs could be at risk of automation, with 63 per cent of all jobs impacted to a medium or large extent.
On the other hand, the adoption of automation is likely to result in higher efficiency, huge productivity gains and less waste. Automation will enable us to use the resources that we have in the most efficient way – and this is bound to result in wealth creation. It will also push human workers away from manual, routine jobs – and it will force them to acquire skills and engage in creative thinking. One thing is for certain: labour markets are changing and they are changing fast!
- What do you think is going to be the effect of automation on labour market participation in the future? Why?
- Using the Solow growth model, explain how automation is likely to affect economic growth and capital returns.
- In the context of the answer you gave to question 2, explain how human capital accumulation may affect the ability of workers to benefit from automation.
 Daron Acemoglu and Pascual Restrepo, Robots and Jobs: Evidence from US Labor Markets, NBER Working Paper No. 23285 (March 2017)
In two recent speeches, the Governor of the Bank of England, Mark Carney, and the Bank’s Chief Economist, Andy Haldane, have reflected on the growing inequality in the UK and other countries. They have also answered criticisms that monetary policy has exacerbated the problem. As, Andy Haldane puts it:
It is clear monetary policy has played a material role in lifting all boats since the financial crisis broke. …[But] even if monetary policy has lifted all boats, and could plausibly do so again if needed, that does not mean it has done so equally. In particular, concerns have been expressed about the potential distributional effects of monetary policy.
Jan Vlieghe [member of the Monetary Policy Committee] has recently looked at how monetary policy may have affected the fortunes of, among others, savers, pension funds and pensioners. The empirical evidence does not suggest these cohorts have been disadvantaged to any significant degree by the monetary policy stance. For most members in each cohort, the boost to their asset portfolios and the improved wages and profits due to a stronger economy more than offset the direct loss of income from lower rates [of interest on savings accounts].
Andy Haldane’s speech focused largely on regional inequality. He argued that productivity has grown much more rapidly in the more prosperous regions, such as London and the South East. This has resulted in rising inequality in wages between different parts of the UK. Policies that focus on raising productivity in the less prosperous regions could play a major role in reducing income inequality.
Mark Carney’s speech echoed a lot of what Andy Haldane was saying. He argued that expansionary monetary policy has, according to Bank of England modelling, “raised the level of GDP by around 8% relative to trend and lowered unemployment by 4 percentage points at their peak”. And the benefits have been felt by virtually everyone. Even savers have generally gained:
That’s in part because, to a large extent, the thrifty saver and the rich asset holder are often one and the same. Just 2% of households have deposit holdings in excess of £5000, few other financial assets and don’t own a home.
But some people still gained more from monetary policy than others – enough to contribute to widening inequality.
Losers from the lost decade
Mark Carney looked beyond monetary policy and argued that the UK has experienced a ‘lost decade’, where real incomes today are little higher than 10 years ago – the first time this has happened for 150 years. This stalling of average real incomes has been accompanied by widening inequality between various groups, where a few have got a lot richer, especially the top 1%, and many have got poorer. Although the Gini coefficient has remained relatively constant in recent years, there has been a widening gap between the generations.
For both income and wealth, some of the most significant shifts have happened across generations. A typical millennial earned £8000 less during their twenties than their predecessors. Since 2007, those over 60 have seen their incomes rise at five times the rate of the population as a whole. Moreover, rising real house prices between the mid-1990s and the late 2000s have created a growing disparity between older home owners and younger renters.
This pattern has been repeated around the developed world and has led to disillusionment with globalisation and a rise in populism. Globalisation has been “associated with low wages, insecure employment, stateless corporations and striking inequalities”. (Click here for a PowerPoint of the chart.)
And populism has been reflected in the crisis in Greece, the Brexit vote, Donald Trump’s election, the rise of the National Front in France, the No vote in the Italian referendum on reforming the constitution and the rise in anti-establishment parties and sentiment generally. Mainstream parties are beginning to realise that concerns over globalisation, inequality and a sense of disempowerment must be addressed.
Solutions to inequality
As far as solutions are concerned, central must be a rise in general productivity that increases potential real income.
Boosting the determinants of long-run prosperity is the job of government’s structural, or supply-side policies. These government policies influence the economy’s investment in education and skills; its capacity for research and development; the quality of its core institutions, such as the rule of law; the effectiveness of its regulatory environment; the flexibility of its labour market; the intensity of competition; and its openness to trade and investment.
But will this supply-side approach be enough to bring both greater prosperity and greater equality? Will an openness to trade be accepted by populist politicians who blame globalisation and the unequal gains from international trade for the plight of the poor? Carney recognises the problem and argues that:
For the societies of free-trading, networked countries to prosper, they must first re-distribute some of the gains from trade and technology, and then re-skill and reconnect all of their citizens. By doing so, they can put individuals back in control.
For free trade to benefit all requires some redistribution. There are limits, of course, because of fiscal constraints at the macro level and the need to maintain incentives at the micro level. Fostering dependency on the state is no way to increase human agency, even though a safety net is needed to cushion shocks and smooth adjustment.
Redistribution and fairness also means turning back the tide of stateless corporations.
… Because technology and trade are constantly evolving and can lead to rapid shifts in production, the commitment to reskilling all workers must be continual.
In a job market subject to frequent, radical changes, people’s prospects depend on direct and creative engagement with global markets. Lifelong learning, ever-greening skills and cooperative training will become more important than ever.
But whether these prescriptions will be accepted by people across the developed world who feel that the capitalist system has failed them and who look to more radical solutions, whether from the left or the right, remains to be seen. And whether they will be adopted by governments is another question!
Roscoe Lecture Bank of England on YouTube, Mark Carney (5/12/16)
One Car, Two Car, Red Car, Blue Car Bank of England, Andrew Haldane (2/12/16)
The Spectre of Monetarism: Roscoe Lecture, Liverpool John Moores University Bank of England, Mark Carney (5/12/16)
Articles: Andrew Haldane speech
Bank of England chief economist says monetary stimulus stopped ‘left behind’ from drowning Independent, Ben Chu (2/12/16)
BoE’s Andrew Haldane warns of regional growth inequality BBC News (2/12/16)
‘Regions would have faced contraction’ without rate cuts and money printing Belfast Telegraph (2/12/16)
Bank of England chief: UK can be transformed if it copies progress on Teesside Gazette Live, Mike Hughes (2/12/16)
Articles: Mark Carney speech
Governor’s ‘dynamite’ warning on wages and globalisation Sky News, Ed Conway (6/12/16)
Mark Carney warns Britain is suffering first lost decade since 1860 as people across Europe lose trust in globalisation The Telegraph, Szu Ping Chan and Peter Foster (5/12/16)
Mark Carney: we must tackle isolation and detachment caused by globalisation The Guardian, Katie Allen (6/12/16)
Bank of England’s Carney warns of strains from globalization Reuters, William Schomberg and David Milliken (6/12/16)
CARNEY: Britain is in ‘the first lost decade since the 1860s’ Business Insider UK, Oscar Williams-Grut (7/12/16)
Carney warns about popular disillusion with capitalism BBC News (5/12/16)
Some fresh ideas to tackle social insecurity Guardian letters (7/12/16)
Monitoring poverty and social exclusion 2016 (MPSE) Joseph Rowntree Foundation, Adam Tinson, Carla Ayrton, Karen Barker, Theo Barry Born, Hannah Aldridge and Peter Kenway (7/12/16)
OECD Income Distribution Database (IDD): Gini, poverty, income, Methods and Concepts OECD
The effects of taxes and benefits on household income Statistical bulletins ONS
- Has monetary policy aggravated the problem of inequality? Explain.
- Comment on Charts 11a and 11b on page 19 of the Haldane speech.
- Does the process of globalisation help to reduce inequality or does it make it worse?
- If countries specialise in the production of goods in which they have a comparative advantage, does this encourage them to use more or less of relatively cheap factors of production? How does this impact on factor prices? How does this affect income distribution?
- How might smaller-scale firms “by-pass big corporates and engage in a form of artisanal globalisation; a revolution that could bring cottage industry full circle”?
- Why has regional inequality increased in the UK?
- What types of supply-side policy would help to reduce inequality?
- Explain the following statement from Mark Carney’s speech: “For free trade to benefit all requires some redistribution. There are limits, of course, because of fiscal constraints at the macro level and the need to maintain incentives at the micro level”.
- Mark Carney stated that “redistribution and fairness also means turning back the tide of stateless corporations”. How might this be done?
Lloyds Banking Group has announced that it plans to reduce its labour force by 9000. Some of this reduction may be achieved by not replacing staff that leave, but some may have to be achieved through redundancies.
The reasons given for the reduction in jobs are technological change and changes in customer practice. More banking services are available online and customers are making more use of these services and less use of branch banking. Also, the increasingly widespread availability of cash machines (ATMs) means that fewer people withdraw cash from branches.
And it’s not just outside branches that technological change is impacting on bank jobs. Much of the work previously done by humans is now done by software programs.
One result is that many bank branches have closed. Lloyds says that the latest planned changes will see 150 fewer branches – 6.7% of its network of 2250.
What’s happening in banking is happening much more widely across modern economies. Online shopping is reducing the need for physical shops. Computers in offices are reducing the need, in many cases, for office staff. More sophisticated machines, often controlled by increasingly sophisticated computers, are replacing jobs in manufacturing.
So is this bad news for employees? It is if you are in one of those industries cutting employment. But new jobs are being created as the economy expands. So if you have a good set of skills and are willing to retrain and possibly move home, it might be relatively easy to find a new, albeit different, job.
As far as total unemployment is concerned, more rapid changes in technology create a rise in frictional and structural unemployment. This can be minimised, however, or even reduced, if there is greater labour mobility. This can be achieved by better training, education and the development of transferable skills in a more adaptive labour force, where people see changing jobs as a ‘normal’ part of a career.
Lloyds Bank cuts 9,000 jobs – but what of the tech future? Channel 4 News, Symeon Brown (28/10/14)
Lloyds Bank confirms 9,000 job losses and branch closures BBC News, Kamal Ahmed (28/10/14)
Lloyds job cuts show the technology axe still swings for white collar workers The Guardian, Phillip Inman (28/10/14)
Unleashing Aspiration: The Final Report of the Panel on Fair Access to the Professions Cabinet Office (July 2009)
Fair access to professional careers: a progress report Cabinet Office (30/5/12)
- Is a reduction in banking jobs inevitable? Explain.
- What could banks do to reduce the hardship to employees from a reduction in employment?
- What other industries are likely to see significant job losses resulting from technological progress?
- Distinguish between demand-deficient, real-wage, structural and frictional unemployment. Which of these are an example, or examples, of equilibrium unemployment?
- What policies could the government pursue to reduce (a) frictional unemployment; (b) structural unemployment?
- What types of industry are likely to see an increase in employment and in what areas of these industries?