Trade-off between productivity gains and job losses isn't so simple

While some have blamed recent job losses on productivity gains, spurning innovation is a recipe for slower growth and even decline

PUBLISHED : Wednesday, 19 February, 2014, 2:06pm
UPDATED : Thursday, 20 February, 2014, 5:00am

A popular view these days is that robots and labour-saving technologies are destroying jobs and creating a growing group of disillusioned people who harbour a deepening sense of alienation from society.

If true, the future indeed looks bleak.

The personal costs of prolonged joblessness are immense, and the consequences of mass unemployment and polarised societies should frighten us all.

If jobs must be traded off for improved productivity, decision-makers are in an unenviable bind. If they pursue productivity growth, embrace new technologies, and foster innovation, they can climb aboard the express train to expansion. Or they can sacrifice modernity and progress to save jobs.

The debate is livelier in industrialised economies than in emerging and developing ones, but it is relevant to all of them.

If jobs must be traded off for improved productivity, decision-makers are in a bind

Most economists believe the notion of a technology trade-off is ill-founded and flies in the face of more than 200 years of historical evidence, where productivity and employment growth have - most of the time - gone hand in hand. They would argue there is no such thing as jobless growth, except in the short term.

But the contrary view has been gaining traction of late.

Unemployment has remained persistently high in many industrial countries, especially following the 2008 recession, which was triggered by mismanagement of the financial sector.

Yet many economies have bounced back, along with corporate profits. The most recent divergence between productivity and employment growth can be traced back to 2000.

When one looks at national data over a slightly longer period, however, the relationship between labour-saving efficiency gains and jobs can be murky.

Work undertaken by three leading economists shows that in France, for example, productivity grew by about 4.75 per cent a year and unemployment averaged 2 per cent in the 15 years up to the mid-1970s.

Then for the subsequent 15 years, productivity growth averaged 2.5 per cent per year and unemployment rose to more than 10 per cent. This suggests that complex linkages and many influences are at play.

Those who believe that the historical link between productivity growth and job growth has been broken base their case on the experience of the last decade and a half.

They argue that the job-killing nature of productivity growth today is unprecedented, affecting a much wider range of occupations than before and taking its toll at record speed.

Digital technologies are raising productivity and replacing jobs in both blue- and white-collar occupations, from warehousing and despatching to retail, accounting, legal and other business services.

Artificial intelligence, 3-D printing and driverless cars are just some of the emerging technologies that will reinforce the jobless economy.

The effect of productivity changes on jobs will be influenced by output trends as well as the pattern of demand.

Output has been sluggish in recent years, and it is difficult over a short period to disentangle macroeconomic factors from the impact of productivity growth.

Productivity increases typically lower prices, encouraging increased demand.

Technological change and innovation are at the heart of the creation and destruction that underlies economic progress and wealth creation. Existing jobs will be destroyed and new jobs created.

Services typically become more important as a source of income and jobs as economies advance.

None of this detracts from the reality that adjustment can be very painful, the fallout more prolonged than necessary - and even permanent in the worst-case scenarios.

Governments bear much of the responsibility for aggravating adjustment costs.

The absence of adequate long-term investments in appropriate infrastructure, education and health is a fundamental cause of prolonged unemployment, especially in industrial countries.

In the perennial political struggle between taxing and spending preferences, those elements of spending that can be cut without upsetting powerful lobbies will be at the front of the queue.

The electoral cycle is too short to induce enough longer-term thinking. This near-term view of the world exacts its price on key sections of the population, especially the young, but does not necessarily damage the electoral prospects of governments.

Inflexible labour markets can do more than technology and innovation to keep unemployment high and job opportunities for new labour market entrants scarce.

Efforts to deal with this problem, however, may well seal a government's electoral fate.

Seen this way, joblessness is not always a consequence of productivity growth.

Emerging economies seeking to overcome the middle-income trap, and poorer economies attempting to diversify away from excessive dependency on a few sectors, have just as high a stake in fostering productivity as do the richest countries.

Spurning productivity growth in order to protect jobs is a sure recipe for slower growth, reduced opportunity and, for some, decline.

Patrick Low is vice-president of research at the Fung Global Institute