Blog Post

AEIdeas

In the new Oxford University study “Industrial Renewal in the 21st Century: Evidence from US Cities,” researchers Thor Berger and Carl Benedikt Frey examine the tech revolution’s job effects. How much creation and how much destruction is really happening — and in what Schumpeterian share? Is society overall benefitting?

Berger and Frey’s results suggest technological unemployment and underemployment are big risks going forward. The digital economy is creating wealth and jobs only for a few. As the FT’s Izabella Kaminska cites from Frey, “Major economies like the US need to think about the implications for lower-skilled workers, to ensure that vast swathes of people don’t get left behind.”

Here are major results of the study:

A central contribution of this paper is to document employment opportunities created in entirely new industries – that appeared for the first time between 2000 and 2010 – associated with the arrival of new technologies. These data are used to examine the determinants of new industry creation, showing that new industries are more likely to emerge in human capital abundant places and cities that specialize in industries that demand similar skills. Yet, the magnitude of workers shifting into new industries is strikingly small: in 2010, only 0.5% of the US labour force is employed in industries that did not exist in 2000. Crucially, it is found that many new industries of the 2000s stem from the digital revolution, including online auctions, internet news publishers, social networking services and the video and audio streaming industry. Relative to major corporations of the early computer revolution, the companies leading the digital revolution have created few employment opportunities: while IBM and Dell still employed 431,212 and 108,800 workers respectively, Facebook’s headcount reached only 7,185 in 2013. Because digital businesses require only limited capital investment, employment opportunities created by technological change may continue to stagnate as the US economy is becoming increasingly digitized. How firms and individuals are responding to digital technologies becoming available is a line of enquiry that deserves further attention.

Kaminska interprets the research as supporting Piketty-esque fears of increasing inequality, capital crushing labor, mass unemployment, and deflation from the lack of consumer demand. And this: “It is, however, looking better for the Schumpeterian conclusion that eventually capitalism must give way to socialism if it’s to create a widespread commonwealth.”

For starters, I recall Schumpeter arguing that capitalism would be destroyed “by its successes, that it would spawn a large intellectual class that made its living by attacking the very bourgeois system of private property and freedom so necessary for the intellectual class’s existence.” That aside, certainly analysts on the left and right have predicted wealth redistribution rather than creation may be the bigger challenge going forward.

As AEI’s Charles Murray said in an AEIdeas blog Q&A last year:

Massive government redistribution is an inevitable feature of advanced postindustrial societies. Our only option is to do that redistribution in the least destructive way. … The point is not just to pass out enough money so that everyone has the means to live a decent existence. Rather, we need to live in a civil society that naturally creates valued places for people with many different kinds and levels of ability. In my experience, communities that are left alone to solve their own problems tend to produce those valued places. Bureaucracies destroy them. So my public policy message is: Let government does what it does best, cut checks. Let individuals, families, and communities do what they do best, respond to human needs on a one-by-one basis.

And my colleague Michael Strain:

There is no question that technology is already having a major impact on the labor market. … Needless to say, if these trends continue then we’re in for a different world. If income for those at the top increases massively — those who can use the machines to increase their productivity, or those who own the machines — while good employment opportunities erode for the majority of Americans, it’s unclear whether society be able to function. Extreme inequality could conceivably lead to riots in the streets and political revolution. We’ve never yet gone so far down this road, so nobody knows what will happen. And if the market can’t sustain adequate wages for a large share of the population, should the government step in with large wage subsidies to fill the gap? It could be necessary to keep the peace. We may end up in a world where the federal government pays over half of the salary for workers in some occupations. Is that political economy sustainable? Will the machines eventually be able to eliminate scarcity, producing all the goods and services we want to consume? If so, will we enter a kind of “Star Trek” future, where people get out of bed in the morning not to earn money but instead to better themselves? Or will we fall to the darker angels of our nature, with unoccupied time leading to a dystopian nightmare of crime, squalor, corruption, and hedonism? Of course, I don’t have the definitive answers to these questions. But even if the optimists are right and we have a utopian future to look forward to, the lessons of the Industrial Revolution suggest that the transition could last quite a while and could be very painful. And utopia is always a bad bet. I am worried. More immediately, how should policy respond to changing technology? Here we need a guiding principle: Work is good. Fighting the rise of the machines may be shouting at the rain, but public policy should encourage and support work nonetheless. Figuring out how to do so is a great and underappreciated challenge facing our nation, and will be the subject of some of my future columns.

Meaningful lives and meaningful work are pretty good goals, while at the same time not taking actions that reduce economic dynamism.