The Future of Employment (Part II)

How Susceptible are Jobs to Computerisation

by Carl Benedikt Frey and Michael A Osborne

http://www.oxfordmartin.ox.ac.uk (September 17 2013)

II. A History of Technological Revolutions and Employment

The concern over technological unemployment is hardly a recent phenomenon. Throughout history, the process of creative destruction, following technological inventions, has created enormous wealth, but also undesired disruptions. As stressed by Schumpeter (1962), it was not the lack of inventive ideas that set the boundaries for economic development, but rather powerful social and economic interests promoting the technological status quo. This is nicely illustrated by the example of William Lee, inventing the stocking frame knitting machine in 1589, hoping that it would relieve workers of hand-knitting. Seeking patent protection for his invention, he travelled to London where he had rented a building for his machine to be viewed by Queen Elizabeth I. To his disappointment, the Queen was more concerned with the employment impact of his invention and refused to grant him a patent, claiming that: “Thou aimest high, Master Lee. Consider thou what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment, thus making them beggars” (cited in Acemoglu and Robinson, 2012, page 182 ff). Most likely the Queen’s concern was a manifestation of the hosiers’ guilds fear that the invention would make the skills of its artisan members obsolete. {5}

The guilds’ opposition was indeed so intense that William Lee had to leave Britain. That guilds systematically tried to weaken market forces as aggregators to maintain the technological status quo is persuasively argued by Kellenbenz (1974, page 243), stating that “guilds defended the interests of their members against outsiders, and these included the inventors who, with their new equipment and techniques, threatened to disturb their members’ economic status.” {6}

As pointed out by Mokyr (1998, page 11): “Unless all individuals accept the “verdict” of the market outcome, the decision whether to adopt an innovation is likely to be resisted by losers through non-market mechanism and political activism.” Workers can thus be expected to resist new technologies, insofar that they make their skills obsolete and irreversibly reduce the ir expected earnings. The balance between job conservation and technological progress therefore, to a large extent, reflects the balance of power in society, and how gains from technological progress are being distributed.

The British Industrial Revolution illustrates this point vividly. While still widely present on the Continent, the craft guild in Britain had, by the time of the Glorious Revolution of 1688, declined and lost most of its political clout (Nef, 1957, pages 26 and 32). With Parliamentary supremacy established over the Crown, legislation was passed in 1769 making the destruction of machinery punishable by death (Mokyr, 1990, page 257). To be sure, there was still resistance to mechanisation. The “Luddite” riots between 1811 and 1816 were partly a manifestation of the fear of technological change among workers as Parliament revoked a 1551 law prohibiting the use of gig mills in the wool-finishing trade. The British government however took an increasingly stern view on groups attempting to halt technological progress and deployed 12,000 men against the rioters (Mantoux, 2006, pages 403-8). The sentiment of the government towards the destruction of machinery was explained by a
resolution passed after the Lancashire riots of 1779, stating that: “The sole cause of great riots was the new machines employed in cotton manufacture; the country notwithstanding has greatly benefited from their erection [and] destroying them in this country would only be the means of transferring them to another [… ] to the detriment of the trade of Britain” (cited in Mantoux, 2006, page 403).

There are at least two possible explanations for the shift in attitudes towards technological progress. First, after Parliamentary supremacy was established over the Crown, the property owning classes became politically dominant in Britain (North and Weingast, 1989). Because the diffusion of various manufacturing technologies did not impose a risk to the value of their assets, and some property owners stood to benefit from the export of manufactured goods, the artisans simply did not have the political power to repress them. Second, inventors, consumers and unskilled factory workers largely benefited from mechanisation (Mokyr, 1990, pages 256 and 258). It has even been argued that, despite the employment concerns over mechanisation, unskilled workers have been the greatest beneficiaries of the Industrial Revolution (Clark, 2008). {7}

While there is contradictory evidence suggesting that capital owners initially accumulated a growing share of national income (Allen, 2009a), there is equally evidence of growing real wages (Lindert and Williamson, 1983; Feinstein, 1998). This implies that although manufacturing technologies made the skills of artisans obsolete, gains from technological progress were distributed in a manner that gradually benefited a growing share of the labour force. {8}

An important feature of nineteenth century manufacturing technologies is that they were largely “deskilling” – that is, they substituted for skills through the simplification of tasks (Braverman, 1974; Hounshell, 1985; James and Skinner, 1985; Goldin and Katz, 1998). The deskilling process occurred as the factory system began to displace the artisan shop, and it picked up pace as production increasingly mechanized with the adoption of steam power (Goldin and Sokoloff, 1982; Atack, et al, 2008a). Work that had previously been performed by artisans was now decomposed into smaller, highly specialised, sequences, requiring less skill, but more workers, to perform. {9} Some innovations were even designed to be deskilling. For example, Eli Whitney, a pioneer of interchangeable parts, described the objective of this technology as “to substitute correct and effective operations of machinery for the skill of the artist which is acquired only by long practice and experience; a
species of skill which is not possessed in this country to any considerable extent” (Habakkuk, 1962, page 22).

Together with developments in continuous-flow production, enabling workers to be stationary while different tasks were moved to them, it was identical interchangeable parts that allowed complex products to be assembled from mass produced individual components by using highly specialised machine tools to a sequence of operations. {10} Yet while the first assembly-line was documented in 1804, it was not until the late nineteenth century that continuous-flow processes started to be adopted on a larger scale, which enabled corporations such as the Ford Motor Company to manufacture the Model T Ford at a sufficiently low price for it to become the people’s vehicle (Mokyr, 1990, page 137). Crucially, the new assembly line introduced by Ford in 1913 was specifically designed for machinery to be operated by unskilled workers (Hounshell, 1985, page 239). Furthermore, what had previously been a one-man job was turned into a 29-man worker operation, reducing the overall work time by 34 percent (Bright, 1958). The example of the Ford Motor Company thus underlines the general pattern observed in the nineteenth century, with physical capital providing a relative complement to unskilled labour, while substituting for relatively skilled artisans (James and Skinner, 1985; Louis and Paterson, 1986; Brown and Philips, 1986; Atack, et al, 2004). {11} Hence, as pointed out by Acemoglu (2002, page 7): “the idea that technological advances favor more skilled workers is a twentieth century phenomenon.” The conventional wisdom among economic historians, in other words, suggests a discontinuity between the nineteenth and twentieth century in the impact of capital deepening on the relative demand for skilled labour.

The modern pattern of capital-skill complementarity gradually emerged in the late nineteenth century, as manufacturing production shifted to increasingly mechanised assembly lines. This shift can be traced to the switch to electricity from steam and water-power which, in combination with continuous-process and batch production methods, reduced the demand for unskilled manual workers in many hauling, conveying, and assembly tasks, but increased the demand for skills (Goldin and Katz, 1998). In short, while factory assembly lines, with their extreme division of labour, had required vast quantities of human operatives, electrification allowed many stages of the production process to be automated, which in turn increased the demand for relatively skilled blue-collar production workers to operate the machinery. In addition, electrification contributed to a growing share of white-collar nonproduction workers (Goldin and Katz, 1998). Over the course of the nineteenth century, establishments became larger in size as steam and water power technologies improved, allowing them to adopt powered machinery to realize productivity gains through the combination of enhanced division of labour and higher capital intensity (Atack, et al, 2008a). Furthermore, the transport revolution lowered costs of shipping goods domestically and internationally as infrastructure spread and improved (Atack, et al, 2008b). The market for artisan goods early on had largely been confined to the immediate surrounding area because transport costs were high relative to the value of the goods produced. With the transport revolution, however, market size expanded, thereby eroding local monopoly power, which in turn increased competition and compelled firms to raise productivity through mechanisation. As establishments became larger and served geographically extended markets, managerial tasks increased in number and complexity, requiring more managerial and clerking employees (Chandler, 1977). This pattern was, by the turn of the twentieth century, reinforced by electrification, which not only contributed to a growing share of relatively skilled blue-collar labour, but also increased the demand for white-collar workers (Goldin and Katz, 1998), who tended to have higher educational attainment (Allen, 2001). {12}

Since electrification, the story of the twentieth century has been the race between education and technology (Goldin and Katz, 2009). The US high school movement coincided with the first industrial revolution of the office (Goldin and Katz, 1995). While the typewriter was invented in the 1860s, it was not introduced in the office until the early twentieth century, when it entered a wave of mechanisation, with dictaphones, calculators, mimeo machines, address machines, and the predecessor of the computer – the keypunch (Beniger, 1986; Cortada, 2000). Importantly, these office machines reduced the cost of information processing tasks and increased the demand for the complementary factor – that is, educated office workers. Yet the increased supply of educated office workers, following the high school movement, was associated with a sharp decline in the wage premium of clerking occupations relative to production workers (Goldin and Katz, 1995). This was, however, not the result
of deskilling technological change. Clerking workers were indeed relatively educated. Rather, it was the result of the supply of educated workers outpacing the demand for their skills, leading educational wage differentials to compress.

While educational wage differentials in the US narrowed from 1915 to 1980 (Goldin and Katz, 2009), both educational wage differentials and overall wage inequality have increased sharply since the 1980s in a number of countries (Krueger, 1993; Murphy, et al, 1998; Atkinson, 2008; Goldin and Katz, 2009). Although there are clearly several variables at work, consensus is broad that this can be ascribed to an acceleration in capital-skill complementarity, driven by the adoption of computers and information technology (Krueger, 1993; Autor, et al, 1998; Bresnahan, et al, 2002). What is commonly referred to as the Computer Revolution began with the first commercial uses of computers around 1960 and continued through the development of the Internet and e-commerce in the 1990s. As the cost per computation declined at an annual average of 37 percent between 1945 and 1980 (Nordhaus, 2007), telephone operators were made redundant, the first industrial robot was introduced by General Motors in the 1960s, and in the 1970s airline reservations systems led the way in self-service technology (Gordon, 2012). During the 1980s and 1990s, computing costs declined even more rapidly, on average by 64 percent per year, accompanied by a surge in computational power (Nordhaus, 2007). {13} At the same time, bar-code scanners and cash machines were spreading across the retail and financial industries, and the first personal computers were introduced in the early 1980s, with their word processing and spreadsheet function s eliminating copy typist occupations and allowing repetitive calculations to be automated (Gordon, 2012). This substitution for labour marks a further important reversal. The early twentieth century office machines increased the demand for clerking workers (Chandler, 1977; Goldin and Katz, 1995). In a similar manner, computerisation augments demand for such tasks, but it also permits them to be automated (Autor, et al, 2003).

The Computer Revolution can go some way in explaining the growing wage inequality of the past decades. For example, Krueger (1993) finds that workers using a computer earn roughly earn ten to fifteen percent more than others, but also that computer use accounts for a substantial share of the increase in the rate of return to education. In addition, more recent studies find that computers have caused a shift in the occupational structure of the labour market. Autor and Dorn (2013), for example, show that as computerisation erodes wages for labour performing routine tasks, workers will reallocate their labour supply to relatively low-skill service occupations. More specifically, between 1980 and 2005, the share of US labour hours in service occupations grew by thirty percent after having been flat or declining in the three prior decades. Furthermore, net changes in US employment were U-shaped in skill level, meaning that the lowest and highest job-skill quartile expanded
sharply with relative employment declines in the middle of the distribution.

The expansion in high-skill employment can be explained by the falling price of carrying out routine tasks by means of computers, which complements more abstract and creative services. Seen from a production function perspective, an outward shift in the supply of routine informational inputs increases the marginal productivity of workers they are demanded by. For example, text and data mining has improved the quality of legal research as constant access to market information has improved the efficiency of managerial decision-making – that is, tasks performed by skilled workers at the higher end of the income distribution. The result has been an increasingly polarised labour market, with growing employment in high-income cognitive jobs and low-income manual occupations, accompanied by a hollowing-out of middle-income routine jobs. This is a pattern that is not unique to the US and equally applies to a number of developed economies (Goos, et al, 2009). {14}

How technological progress in the twenty-first century will impact on labour market outcomes remains to be seen. Throughout history, technological progress has vastly shifted the composition of employment, from agriculture and the artisan shop, to manufacturing and clerking, to service and management occupations. Yet the concern over technological unemployment has proven to be exaggerated. The obvious reason why this concern has not materialised relates to Ricardo’s famous chapter on machinery, which suggests that labour-saving technology reduces the demand for undifferentiated labour, thus leading to technological unemployment (Ricardo, 1819). As economists have long understood, however, an invention that replaces workers by machines will have effects on all product and factor markets. An increase in the efficiency of production which reduces the price of one good, will increase real income and thus increase demand for other goods. Hence, in short, technological progress has two competing effects on employment (Aghion and Howitt, 1994). First, as technology substitutes for labour, there is a destruction effect, requiring workers to reallocate their labour supply; and second, there is the capitalisation effect, as more companies enter industries where productivity is relatively high, leading employment in those industries to expand.

Although the capitalisation effect has been predominant historically, our discovery of means of economising the use of labour can outrun the pace at which we can find new uses for labour, as Keynes (1933) pointed out. The reason why human labour has prevailed relates to its ability to adopt and acquire new skills by means of education (Goldin and Katz, 2009). Yet as computerisation enters more cognitive domains this will become increasingly challenging (Brynjolfsson and McAfee, 2011). Recent empirical findings are therefore particularly concerning. For example, Beaudry, et al (2013) document a decline in the demand for skill over the past decade, even as the supply of workers with higher education has continued to grow. They show that high-skilled workers have moved down the occupational ladder, taking on jobs traditionally performed by low-skilled workers, pushing low-skilled workers even further down the occupational ladder and, to some extent, even out of the labour force.
This raises questions about: (a) the ability of human labour to win the race against technology by means of education; and (b) the potential extent of technological unemployment, as an increasing pace of technological progress will cause higher job turnover, resulting in a higher natural rate of unemployment (Lucas and Prescott, 1974; Davis and Haltiwanger, 1992; Pissarides, 2000). While the present study is limited to examining the destruction effect of technology, it nevertheless provides a useful indication of the job growth required to counterbalance the jobs at risk over the next decades.

Notes:

{5} The term artisan refers to a craftsman who engages in the entire production process of a good, containing almost no division of labour. By guild we mean an association of artisans that control the practice of their craft in a particular town.

{6} There is an ongoing debate about the technological role of the guilds. Epstein(1998), for example, has argued that they fulfilled an important role in the intergenerational transmission of knowledge. Yet there is no immediate contradiction between such a role and their conservative stand on technological progress: there are clear examples of guilds restraining the diffusion of inventions (see, for example, Ogilvie, 2004).

{7} Various estimations of the living standards of workers in Britain during the industrialisation exist in the literature. For example, Clark (2008) finds that real wages over the period 1760 to 1860 rose faster than GDP per capita. Further evidence provided by Lindert and Williamson (1983) even suggests that real wages nearly doubled between 1820 and 1850. Feinstein (1998), on the other hand, finds a much more moderate increase, with average working-class living standards improving by less than fifteen percent between 1770 and 1870. Finally, Allen (2009a) finds that over the first half of the nineteenth century, the real wage stagnated while output per worker expanded. After the mid nineteenth century, however , real wages began to grow in line with productivity. While this implies that capital owners were the greatest beneficiaries of the Industrial Revolution, there is at the same time consensus that average living standards largely improved.

{8} The term skill is associated with higher levels of education, ability, or job training. Following Goldin and Katz (1998), we refer to technology-skill or capital-skill complementarity when a new technology or physical capital complements skilled labour relative to unskilled workers.

{9} The production of ploughs nicely illustrates the differences between the artisan shop and the factory. In one artisan shop, two men spent 118 man-hours using hammers, anvils, chisels, hatchets, axes, mallets, shaves and augers in eleven distinct operations to produce a plough. By contrast, a mechanized plough factory employed 52 workers per forming 97 distinct tasks, of which 72 were assisted by steam power, to produce a plough in just 3.75 man-hours. The degree of specialization was even greater in the production of men’s white muslin shirts. In the artisan shop, one worker spent 1439 hours performing 25 different tasks to produce 144 shirts. In the factory, it took 188 man-hours to produce the same quantity, engaging 230 different workers performing 39 different tasks, of which more than half required steam power. The workers involved included cutters, turners and trimmers, as well as foremen and forewomen, inspectors, errand boys, an engineer, a fireman, and a watchman (US
Department of Labour, 1899).

{10} These machines were sequentially implemented until the production process was completed. Over time, such machines became much cheaper relative to skilled labour. As a result, production became much more capital intensive (Hounshell, 1985).

{11} Williamson and Lindert (1980), on the other hand, find a relative rise in wage premium of skilled labour over the period 1820 to 1860, which they partly attribute to capital deepening. Their claim of growing wage inequality over this period has, however, been challenged (Margo, 2000). Yet seen over the long-run, a more refined explanation is that the manufacturing share of the labour force in the nineteenth century hollowed out. This is suggested by recent findings, revealing a decline of middle-skill artisan jobs in favour of both high-skill white collar workers and low-skill operatives (Gray, 2013; Katz and Margo, 2013). Furthermore, even if the share of operatives was increasing due to organizational change within manufacturing and overall manufacturing growth, it does not follow that the share of unskilled labour was rising in the aggregate economy, because some of the growth in the share of operatives may have come at the expense of a decrease in the share of workers
employed as low-skilled farm workers in agriculture (Katz and Margo, 2013). Nevertheless, this evidence is consistent with the literature showing that relatively skilled artisans were replaced by unskilled factory workers, suggesting that technological change in manufacturing was deskilling.

{12} Most likely, the growing share of white-collar workers increased the element of human interaction in employment. Notably, Michaels, et al (2013) find that the increase in the employment share of interactive occupations, going hand in hand with an increase in their relative wage bill share, was particularly strong between 1880 and 1930, which is a period of rapid change in communication and transport technology.

{13} Computer power even increased eighteen percent faster on annual basis than predicted by Moore’s Law, implying a doubling every two years (Nordhaus, 2007).

{14} While there is broad consensus that computers substituting for workers in routine-intensive tasks has driven labour market polarisation over the past decades, there are, indeed, alternative explanations. For example, technological advances in computing have dramatically lowered the cost of leaving information-based tasks to foreign worksites (Jensen and Kletzer, 2005; Blinder, 2009; Jensen and Kletzer, 2010; Oldenski, 2012; Blinder and Krueger, 2013). The decline in the routine-intensity of employment is thus likely to result from a combination of offshoring and automation. Furthermore, there is evidence suggesting that improvements in transport and communication technology have augmented occupations involving human interaction, spanning across both cognitive and manual tasks (Michaels, et al, 2013). These explanations are nevertheless equally related to advance in computing and communications technology.

References: See URL below.

http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf

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