Machine Age II: Dawn of the unemployed

US retailers donate excess clothing (made cheaply in Asia and shipped back) to homeless charities to help down-and-out Americans. There is no denying the generosity of such an act. But what is this chain of events telling us? That emerging economies have "taken our jobs"? Or that the US has failed to adapt to a changing world economy and create new job opportunities?

Over the past 20 years, some middle-skilled jobs did migrate to countries that were able to provide labour at a lower cost than at home. At the last count, China accounted for 40 per cent of all clothing imports into the US. Such a shift was unsurprising. Making clothes required some skill but relied on repetition across dozens of lines. A Chinese middle-skilled labourer was in all ways identical to a US labourer except one - cost. Wages paid to Chinese workers were lower than their US counterparts.* In order to increase profits, firms chose to locate production in an area with the cheapest operating costs. Thanks to globalisation, which reduced geographical barriers between countries, it no longer mattered where in the world that was.

But other middle-skilled jobs have disappeared because of technological progress - particularly in IT - that automates tasks and renders the job obsolete. Sales assistants at grocery stores have been replaced by self-checkout kiosks. Secretarial pools have been replaced by computers. The speed of such change feels rapid. The US Bureau of Labor Statistics predicts that it will continue to be so - some of the fastest falls in occupations between now and 2020 will be in middle-skilled occupations.

Source: Tuzemen and Willis (2013)

The gap left behind in the US labour market has not been filled by equivalent jobs. Instead, there has been a rise in the share of high-skilled jobs - professional and managerial roles - that computers cannot yet perform because of the cognitive and non-cognitive skills they require. This is known as skills-bias technical change** because securing these jobs requires advanced qualifications and so favours those who have - or can obtain - such skills. Between 1983 and 2012, the share of high-skilled jobs in the US labour market increased from 26 per cent to 37 per cent (Figure 1). These skills earn a premium in the form of higher wages.

There has also been an increase in the share of low-skilled jobs (Figure 1). These tasks are manual and service orientated (think cleaners, waiters, security staff) and today cannot be automated or relocated offshore. But because these jobs require fewer skills, they are open to more people, including those who would have previously taken on middle-skilled jobs. Competition has increased, reducing the wage premium (see last week's blog for a discussion of trends in low wages). Inevitably, this will lead to some people being out of work. Worse, it might lead to people dropping out of the workforce altogether. Indeed, the participation rate - the fraction of people aged 16 and over actively looking for work - fell to 63 per cent in May from a high of 66 per cent prior to the last recession.  

Looking ahead, some think that the speed with which the US economy could be upended by technological change might be even faster than in previous years. The dawning of the so-called "second machine age" would eliminate the need for many more occupations, perhaps even some low-skilled ones. The idea that everyday tasks will be completed by a robot may be a bit far-fetched today. But 20 years ago, it would have seemed strange to think that we wouldn't talk to a cashier while they scanned our groceries or dictated a letter to a secretary to print, sign and send by post.

To keep pace with such change, and to prepare our future workforce, we must adapt our learning environment today. This includes investing in K-12 and higher education. But it also means embracing new forms of online learning, like mass open online courses, that open up high-quality education to the whole population. This will enable the future generation to have the right skills to participate in the "second machine age". Not doing so risks leaving an increasing share of the population behind. Who knows where their clothes will be made.

* Though given a rising middle class in China, labour costs are creeping up, which is leading to shifts in production to other parts of Asia.
** Link to earlier publicly-available version.