The maid, the clerk, the doctor & their computer: so now, what?

This article is written together with Eduardo Giménez, Professor of Economics at the University of Vigo. It is the first part out of four, which will be published in this blog. The full article will be published in the book "Automatization" , which will be published by the European Liberal Forum at the end of the year.

 

This morning, the newspaper picks up that, as every year, Shanghai hosts the trade fair CES ASIA for the consumer technology industry. A company named Bubble Lab presented at the fair a sophisticated robotic arm capable of preparing tea, coffee, and cocktails. After the service, it even cleans the table and leaves it spotless. Mr. Shen Li, representing the company at the fair, says “I do not know if it's true that is going to end human work, but the fact is that machines can perform ever more complicated tasks”. So far, computers and computer-controlled equipment have replaced human labor in a wide variety of tasks. Yet, as well the above anecdote illustrates, technological developments can widely expand the set of tasks which can be performed by machines. Many already suspect that all tasks not requiring creativity will be made in the near future by machines.

Redistribution

A question then arises: in such event, what shall await all those who do not have the necessary skills, namely, creativity? The American film Elysium, released in 2013, describes a dystopian future in which machines perform most tasks. People who have been replaced by machines barely survive on a degraded planet Earth, while small elite inhabits an artificial satellite orbiting our planet. The film is just science fiction. However, you can imagine a society in which a high-skill minority performs tasks highly complementary for technological capital and concentrates most of income and wealth, while most people survives by producing low-price goods in highly automatized productive process (see Cowen (2013)).

We do not pretend to claim that we shall get to this situation. Nonetheless, thinking a future in which automatization of productive processes and increasing importance of non-rivalries give rise to a polarized society can be convenient in order to consider new and more suitable ways of redistribution. Proposal such as basic income (Van Parijs (1995)), the distribution of ownership of some productive assets (Paine (1797), Roemer (1994)), or a negative income tax (Friedman (1968)) should be discussed, especially the last one. The big challenge comes from combining the new mechanisms of redistribution with the necessary incentives for prosperity. However, the advantages of these redistributive proposals should not be ignored because they would allow reducing direct state intervention in the provision of goods and services such as education, health, social assistance and social insurance.

Education

An education system which fosters creativity and provides the suitable knowledge for the new technological reality is urgently needed in order to successfully meet the new technological challenges. We know, this is nothing but a vague generalization. However, many authors have recognized that educational systems suffer from sclerosis. Goldin and Katz (2008) blame the US educational system for not having sufficiently adapted to the demands of the new reality and they do it accountable, at least partially, for the increase in wage inequality in the United States (see also Acemoglu and Autor (2012)). Brynjolfsson and McAfee (2014) ask for redirecting the educational system from its focus on reading and mathematics, typical of the industrial era, towards a broader set of intellectual and personal skills. Even UNESCO held in 2015 a World Education Forum "Rethinking Education". Thus, this institution is aware that something is going wrong with the worldwide education systems.

We do not want to be so presumptuous to pretend to know what changes the education system should exactly perform. Notwithstanding, we dare to claim our conviction that the inability of the education system to adapt to new times has a lot to do with state interventionism. To overcome atrophy, it is required that the state interventionism in Education decreases. Thereby, new educational alternatives will arise from competition and the subsequent processes of creative destruction. Introducing school vouchers would be helpful (Friedman (1955)). Vouchers already exist in Sweden and Denmark, but not in most of European countries. However, the school voucher is not enough. The state must give up the tight control of the education system. Educational innovation will not be possible if it is subject to the restrictions imposed by a straitjacket.

In a changing world, in which many workers are at risk of being displaced from their jobs by machines, it is important to be very aware the needs of recycling of these workers. Therefore, the reskilling of workers and training support for unemployed are key issues. Once again, the best way to achieve the objectives in this area is to abandon the direct state intervention and to allow that the markets work. To this end, the severance pays should be substituted for periodic contributions to worker's capitalization funds (the so-called Austrian fund), which could be used for reskilling, and the unemployed workers should be provided with training vouchers with which to finance their preferred training courses given by the provider that they consider most suitable.

           Taxes and regulations

Tax systems should also be adapted to the new technological reality. In many countries, Spain is a good example, labor incomes are excessively burdened by taxes. If machines and overseas labor are replacing domestic workers in performing many tasks, labor income can no longer bear the tax burden. In particular, welfare state funding should not mainly fall on labor income any longer, as it currently happens in many countries. The contributions to social security and other charges on labor should be cut back, as well as more flexible labor relationships should be allowed.

Reducing the tax burden on labor without a dramatic increase in other taxes, it might be only possible if welfare state efficiency is improved. This would likely require new organizational models in public services. Greater individual freedom to choose and increased competition would help to promote efficiency. Higher capitalization of the pension systems, accompanied by a higher level of private participation in their management, a higher weight of the private sector in providing health services, and a higher private participation in employment insurances and active employment policies are some directions to improve. Moreover, substituting machines for workers and the growing importance of new forms of human capital might affect the birth rate, which would have significant impact on the pension system.

The market regulations could hinder innovation. The regulation of GMOs in Europe or the difficulties faced by the so-called share economy –a silly name, certainly- to enter in hyper-regulated markets are some examples of how regulation can hinder innovation. Particular consideration should be given to financial regulation. The regulation of financial markets should also be cautious. Otherwise, innovative activities may suffer due to difficulties to be financed. Thus, eliminating some regulatory barriers and rethinking regulation seems necessary to face the new technological reality.

Moreover, polarization of the labor market reflects that large sections of the middle-class may currently be adversely affected by new technologies, at least in the short term. Everyone is aware of the importance of the middle class preferences in determining public policies in a democratic society. The reaction to technological change may lead, therefore, to successful demands for greater barriers to trade or to technological adoption, as well as to pressures to implement redistributive policies in favor of these sections of the middle-class (more public employment oriented to these sections, for instance).  One cannot help thinking that some recent political processes in Europe follow this logic.

Convergence

Information and communications technologies are expanding and facilitating access to information (and, thus, to knowledge and technology) to everyone anywhere. This, together with reduced transport costs and the elimination of political obstacles to mobility of goods and productive factors, is facilitating interactions at a global scale and technological adoption by developing countries. Friedman (2006) asserts that, after the end of the eighties, we are in a new stage of globalization (which he calls globalization 3.0).

If technological progress is equalizing opportunities for countries (flattening the world, as Friedman (2006) likes to say), then one should not be surprised to observe in the near future the proliferation of spectacular economic miracles and a rapid change in the geo-economic map. However, the spread of prosperity-promoting institutions around the world cannot stop. Institutions securing property rights and ensuring a free and open society are indispensable for innovation and accumulation. If so, access to information facilitates technological adoption and, consequently, the rapid convergence of the laggards to the most advanced will be seen. However, it must be borne in mind the flip side. A country that rest on its laurels may experience a rapid relative decline.

Democracy

Finally, the main problem that any organization must to solve is to transmit all relevant information to all concerned agents. The information and communications technologies facilitate processing and transmitting information. Therefore, the development of information and communications technologies might induce, in the near future, institutional changes that would improve the functioning of state.

References

Acemoglu, D. & Autor, D. H. (2012). What does human capital do? A review of Goldin and Katz's The race between education and technology. NBER Working Paper 17820.

Brynjolfsson, E., & McAfee, A. (2014). The second machine age: work, progress, and prosperity in a time of brilliant technologies. WW Norton & Company.

Cowen, T. (2013). Average is over: powering America beyond the age of the great stagnation. Penguin Publishing Group.

Friedman, M. (1955). The role of government in education. Economics and the Public Interest.

Friedman, M. (1968). The case for the negative income tax: a view from the right. Issues in American Public Policy. Ed. JH Bunzel. Englewood: New Jersy, 111-120.

Friedman, T. L. (2006). The world is flat: The globalized world in the twenty-first century (pp. 3-543). London: Penguin.

Goldin, C., & Katz, L. (2008). The race between technology and education. Cambridge, MA: Harvard.

Paine, T. (2004). Agrarian Justice (1797). In The Origins of Universal Grants (pp. 3-16). Palgrave Macmillan UK.

Roemer, J. E. (1994). A future for socialism. Harvard University Press.

Van Parijs, P. (1995). Real Freedom for All: What (If Anything) Can Justify Capitalism?. Clarendon Press.

The maid, the clerk, the doctor & their computer: globalization

 This article is written together with Eduardo Giménez, Professor of Economics at the University of Vigo. It is the first part out of four, which will be published in this blog. The full article will be published in the book "Automatization" , which will be published by the European Liberal Forum at the end of the year.

Offshoring

The development of information and communications technologies has resulted in a drastic reduction in both costs of processing information and transmitting it between two any point on the globe. The production processes do not necessarily have to be organized locally any more. Now, the possibility of vertical integration is opened at a planetary scale. This means that the various tasks of a production process can be located in distant parts of the globe. This process is known as offshoring.

Of course, this process of offshoring has a significant impact on international trade. In particular, trade in intermediate products is gradually becoming increasingly important relative to traditional trade in final products; much of the recent surge of international trade comes from middle- and low-countries; and prices of manufactured imports by developed countries from developing countries are dramatically declining. Baldwin (2011) argues that we are witnessing since the late eighties to a second type of globalization characterized by what he called connective technologies, which are enabling a drastic reduction in the cost of transmitting information (thus facilitating access to knowledge and global connection of people and companies), while the previous stage of globalization was driven by a sharp reduction in transport costs and political barriers to trade.

Figure 1

Source: Baldwin (2011).

As Blinder and Krueger (2013) have argued, essentially any job that does not need to be done in person (i.e., face-to-face) can ultimately be offshored, regardless of whether its primary tasks are abstract, routine, or manual. With this possibility in mind, it is not surprising that offshoring –being possible thank to the information and communications technologies- is affecting differently to the three characters of our story. The doctor and the maid perform tasks that cannot be offshored, not yet at least, while the tasks of the clerk are increasingly being offshored. Therefore, offshoring is also contributing to alter the relative demand of the different kinds of workers and, consequently, is affecting their relative wages. 

Occupations threatened by the computer replacement and those under the threat of relocation are not exactly the same. However, in general, it can be asserted that many occupations performed by middle-skill workers –workers with high-school or some college education- are currently confronting both threats. Autor and Acemoglu (2011) report that (i) offshorability is highest in clerical and sales occupations which imply a high degree of routine tasks; (ii) offshorability is also high in professional, managerial and technical occupations, which imply a high degree of non-routine tasks, and (iii offshorability is relatively low in production and operative occupations and even lower in service occupations. The measures of offshorability reported by Acemoglu and Autor are roughly consistent with the measures reported by Blinder and Krueger (2013). However, it must be pointed out that there is a large heterogenity into the category "production and operative occupations". According to the estimates provided by Blinder and Krueger (2013), farming, fishing and forestry occupations, construction and extraction occupations, installation, maintenance and repair occupations, and transporting and material moving occupations have a very low degree of offshorability, but other production occupations have a very high degree of offshorability. In particular, according to their best measure, 80% of jobs in other production occupations are offshorable. Offshorability is also very high in office and administrative support occupations, 41% of job in these occupations are offshorables according to the best measure reported by Blinder and Krueger. Offshorability is also high in sales and related occupations (17.8%), professional and related occupations (20.5%), and managment, business, and financial occupations (16.4%). However, the percentage of offshorable jobs in service occupation is only 0.7%. Blinder and Krueger (2013) estimate that roughly 25% of U.S jobs are offshorable. The fith column of Table 1 displays a measure of offshorability of several occupations in 16 European countries elaborated by Goos et al. (2010) (a higher number means higher offshorability).

Table 1

Source: Goos, Maning and Salomons (2010)

Autor, Dorn and Hanson (2015) reports that the U.S. local labor markets whose initial industry composition exposes them to rising Chinese import competition experience significant falls in employment, particularly in manufacturing and among non-college workers. Ebenstein et al. (2009) present evidence that globalization has put downward pressure on worker wages through the  reallocation of workers away  from higher  wage manufacturing jobs into other sectors and other  occupations. Using a panel of  workers, they find that occupation switching due to  trade led to  real wage losses of 12 to 17 percentage points.

Superstars

So far, our history has been about ordinary workers. Maids, clerks, doctors,...we can find thousands. However, a small number of workers are out of the norm. They are superstars (see Rosen (1981)), as the soccer players Leo Messi or Slatan Ibrahimovic. In recent decades, there has been an impressive burst of earnings of this so-special type of workers.

The income share of the top 1% of income distribution has soared since the late eighties (see Figure 2). At this stage of XXI century in countries like the United States or Britain, the top 1% income share is hovering at the figures observed at the beginning of the past century (see Atkinson, Piketty and Saez (2011)). In fact, much of the increase in inequality in income distribution in many developed countries is explained by the increase in the top 1% (see Bell and Van Reenen (2010)). Keep in mind the shocking remunerations for the most CEOs of large companies (see Figure 3). Before the eighties, their earnings were certainly enviable, but did not reach, not even by far, the stratospheric current figures (see Frydman and Jenter (2010)). Gabaix and Landier (2006) give an explanation of the increase in CEO earnings based on the ideas developed below.

Figure 2

Source: Van Reenen (2010). Top 1% share of all income in English speaking countries.

Figure 3

Source: Frydman and Jenter (2010). Data for the United States.

To understand the relationship between the earnings of the superstars and technical change, consider Luis Suárez, footballer of F.C. Barcelona in the fifties, and Luis Suárez, currently footballer of F.C. Barcelona.[1]  In the fifties and sixties, Suárez I, as Suárez II today, produced non-rival goods –shots, dribbling, passing, goals,...- which could be enjoyed by a lot of people at the same time. People paid to see the exploits of Suárez I on the pitch, and now pay for Suárez II’s goals. Suárez I, as Suárez II today, earned a lot of money because a lot of people watched and admired his gaming.  However, in the fifties, when Suárez I played soccer, technology only allowed a hundred thousand people to watch Suárez I’s gaming: those people who attended every Sunday to Camp Nou Stadium. Nowadays, millions of people around the globe watch the goals of Suárez II every week on their televisions and millions more may dream of being Suárez II playing on their gaming consoles. More people can currently enjoy Suárez II’s gaming than Suárez I’s in the fifties and sixties thanks to the information and communications technologies.  Accordingly, Suárez II’s earnings are much higher than Suárez I ever dreamed.

Moreover, the difference between Suárez II’s earnings and most players in the Spanish soccer league is greater than the difference between Súarez I’s earnings and most players in the Spanish league at those days. In the fifties, football-mad people of Vigo had to attend Balaídos Stadium to watch R.C. Celta de Vigo matches because they could not see to play Suárez I every week. They paid their tickets, as the supporters of F.C Barcelona did to attend Camp Nou Stadium. In the fifties, Barcelona soccer players earned more money than Celta soccer players because more people went to watch them, but, not much more. Nowadays, people from Vigo do not need to attend Balaídos Stadium to watch soccer. They can watch F.C. Barcelona matches using the pay-perview digital television services and, consequently, Barcelona soccer players earn much more money than their colleagues of R. C. Celta. This increase in earning differences is a consequence from that, when people produce non-rival goods, the winner takes all. In the example, watching soccer in the stadium is not the same as watching soccer on TV, watching your team is not the same as watching any other team,…There are several reasons because R.C. Celta and F.C Barcelona are not perfect substitutes, so that the core idea “winner takes all” does not work perfectly.

In short, the development of the information and communications technologies is increasing the degree of non-rivalry of some goods produced by some economic agents, which allows them to earn a lot of money if they are the winners of a “winner-take-all” race. This means that globalization driven by the information and communications technologies has played an important role in boosting demand for the services of some superstar workers, which has increased their earnings and income inequality.

References

Acemoglu, D., & Autor, D. H. (2011). Skills, tasks and technologies: Implications for employment and earnings. Handbook of Labor Economics, 4, 1043-1171.

Atkinson, A. B., Piketty, T., & Saez, E. (2011). Top incomes in the long run of History. Journal of Economic Literature, 49(1), 3-71.

Autor, D. H., Dorn, D., & Hanson, G. H. (2015). Untangling trade and technology: Evidence from local labour markets. The Economic Journal, 125(584), 621-646.

Baldwin, R. (2011). Trade and industrialisation after globalisation's 2nd unbundling: How building and joining a supply chain are different and why it matters. NBER Working Paper 17716.

Bell, B., & Van Reenen, J. (2010). Bankers’ bonuses and extreme wage inequality in the UK. Centre for Economic Performance Special Report Nº 21.

Blinder, A., & Krueger, A. B. (2013). Measuring offshorability: A survey approach. Journal of Labor Economics, 31(S1), S97-S128. 

Ebenstein, A., Harrison, A., McMillan, M. and S. Phillips (2009). Estimating the impact of trade and ofshoring on American workers using the current populations surveys. NBER Working Paper 15107.

Frydman, C., & Jenter, D. (2010). CEO Compensation. Annual Review of Financial Economics, 2(1), 75-102.

Gabaix, X. and Landier, A. (2006). Why has CEO pay increased so much? NBER Working Paper 12365.

Goos, M., Manning, A., & Salomons, A. (2010). Explaining job polarization in Europe: the roles of technology, globalization and institutions. CEP Discussion Paper Nº 1026, LSE.

Rosen, S. (1981). The economics of superstars. The American Economic Review, 71(5), 845-858.

Van Reenen, J. (2011). Wage inequality, technology and trade: 21st century evidence. Labour Economics, 18(6), 730-741.

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[1] The supporters of Deportivo de La Coruña -hometown of Suarez- had the opportunity to enjoy the Suárez’s gaming prior to his passage by F.C. Barcelona. Afterward, Luis Suárez won two European Cups with Inter of Milan. Luis Suarez is the only Spanish soccer player (Galician, more precisely) winning a Golden Ball. The homonymous Uruguayan player who currently plays in the ranks of F.C Barcelona was so named in his honor.