An industrial policy for economic upgrading and achieving desirable social outcomes


The fourth industrial revolution will bring radical changes—both positive and negative—in the economy and in society. Convenience and ease of carrying out tasks are among those that new technologies such as the internet of things (IOT), artificial intelligence (AI), blockchain, and automation, also considered disruptive technologies because of their impact on consumer and producer behavior. Consumer welfare increases because these new technologies facilitate consumption by reducing costs, and such is the case of online shopping where consumers realize huge savings in terms of time spent on shopping. Firms also benefit from better information and analytics brought by machine learning and artificial intelligence, and lower cost of production due to automation. However, the changes brought about by the fourth industrial revolution have serious drawbacks particularly for economic activities and jobs that will be destroyed. In the long run, huge returns accruing to the owners of technology and capital can reinforce existing income inequality. High levels of inequality can cause social division that can negatively impact the economy.

Although the impacts of technological change on jobs and income inequality have been explored in the literature, it is likely that these foreseen effects will occur unless insights on how to address the negative effects of technological changes are translated into actual policies. However, most policies that seek to address the negative implications of automation and disruptive technologies assume the inevitability of job destruction and focus on encouraging workers to acquire new skills. Skills upgrading of workers is important to keep them employed. However, a policy that mainly involves supply side approach that only responds to anticipated technological shocks will likely serve business interest more and put most of the burden on labor. For instance, although facilities for skills upgrading exist, it remains costly to undergo specialized trainings especially when it is left to market. Workers who cannot afford to undergo trainings will certainly be left behind by technological change. A better approach to the fourth industrial revolution involves the state intervening to influence firms to create jobs where technology complements labor rather than substitute for it, and encourage investment of firms on their workers through skills upgrading.

This policy note surveys existing government policies on the fourth industrial revolution and discusses insights on how the government can address employment challenges created by rapid technological change. This policy note also argues that social outcomes must be incorporated in industrial policies to ensure that 4IR does not lead to welfare losses for workers.

Government policies

The first explicit government policy direction in response to the fourth industrial revolution is documented in the Department of Trade and Industry’s ‘Inclusive Industries Innovation Strategy” (I3S). Based on the said document, the government’s strategy is oriented toward harnessing the possibilities of the 4IR, with the twin aims of (1) elevating priority industries’ position in the global value chain and (2) generating more and high-quality jobs for Filipinos via innovative technologies as key motivations.

According to de la Cruz (Forthcoming), skills development appears to be the most developed component of the government’s fourth industrial revolution response to date. The transition to 4IR is the major theme in the Technical Education and Skills Development Authority’s (TESDA) 2018-2022 National Technical Education and Skills Development Plan (NTESDP). Now that TESDA has been attached as an office directly under DTI, its skills development policies must now be closer to firms and industries. One of the NTESDP’s principal objectives is to “prepare the Philippine workforce for the challenges of the 4IR”, chiefly via the increased adoption of enterprise-based training and Skills Needs Anticipation mechanisms and stronger alignment of national TVET regulations to international standards (TESDA, 2018). Beyond the existing TESDA scholarships and job-specific apprenticeships, however, the issue of funding for inclusive worker re-/upskilling efforts remains in question. This uncertainty is exacerbated by inconsistent government support for such programs, as illustrated by the lack of government funds allocated to TESDA’s “Tulong Trabaho” initiative in 2020, which was supposed to provide free TVET training and related financial assistance to qualified beneficiaries, including those displaced by technological unemployment (CNN Philippines, 2019).

To realize its other goal of generating more formal and stable employment for Filipino workers, the i3S promotes the advancement of technology-driven growth and increased industrialization. Apart from the establishment of an innovation and entrepreneurship ecosystem, a crucial element of the i3S is thus the revitalization of the Philippine’s manufacturing base (e.g. electronics, automotive), given the sector’s greater capacity for job generation and stable working conditions compared to the services industry (Usui, 2012; Aldaba, 2013; Llanto and Ortiz, 2015). A major example of this support to the manufacturing industry is the Comprehensive Automotive Resurgence Strategy (CARS) program. First launched in 2015, CARS aims to position the Philippines as a regional automotive manufacturing hub by drawing new investments, stimulating domestic demand, adjusting relevant government regulations, and providing time-bound and performance-based fiscal incentives to domestic vehicle and parts manufacturers (Rosellon and Medalla, 2017). A more recent initiative is the Securing Manufacturing Revitalization and Transformation (SMART) program, which was announced by DTI in December 2019 (Manila Bulletin, 2019). The SMART program is set to provide financial support to priority projects in manufacturing such as electronic vehicles and rural industrial development, with the aim of encouraging the industry’s adoption of innovative technologies that will enhance its position in the global value chain and translate into job-creating growth.

Ensuring that social outcomes are achieved

Social outcomes must be integrated in industrial policies so the transition toward 4IR does not reduce welfare of workers. First, while awareness of the impacts of technological change is important in the transition toward 4IR, policies that provide support to firms and workers must be adequately funded. The government’s skills development plan is an important policy. However, unless such program is funded, training of workers will only have limited reach and produce suboptimal outcomes such as the mismatching of skills, or the outright shortage of workers that possess the appropriate skills for work.

Second, skills training must be matched by income support for workers. The government recently enacted unemployment insurance (UI) for workers in the private sector. UI, especially when adequately funded, can provide an income bridge especially for workers who are undergoing skills upgrading. Moreover, UI can also motivate unemployed workers to undergo skills trainings because they are assured of income despite not being able to work.

Lastly, employment creation must be part of industrial policies. Policies like CARS and SMART have the potential of generating employment by influencing firms’ decision toward adoption of labor-complementing technologies. However, the state must still ensure that firms that enjoy fiscal support indeed generate employment. To this end, an explicit employment target can be set for firms that will avail of fiscal support.

The implications of automation on inequality


The fourth industrial revolution will bring radical changes to the economy, both positive and negative. The internet of things (IOT), artificial intelligence (AI), blockchain, and automation—these are just of the new technologies that are set to change the economy and people’s lives. Consumers will mainly experience positive changes due to these technological changes. Meanwhile, workers are among those mostly on the losing side especially when these technologies cause displacement and redundancies and force firms to reduce their workforce.

But not all technological changes are of the labor-displacing type. Acemoglu and Restrepo (2018) and Autor and Salomons (2018) identified four types of technological changes that can occur under the fourth industrial revolution and these can be characterized by their impacts on the labor market:

  • Labor-displacing technological change depresses wages and decreases labor demand.
  • Labor-augmenting technological adoption increases the productivity of labor, leading to increases in wages (but not employment).
  • Intensive-margin advances deepen the productivity of capital or machines in areas where automation has already progressed, increasing both labor demand and wages.
  • Creation of new tasks involves technological change that develop niches for activities where labor has a comparative advantage relative to capital, thereby boosting labor demand.

Current discourse on automation puts emphasis on labor-displacing technological changes because of their impact on employment, income, and inequality. Automation will render many tasks performed by labor redundant and this implies not only employment loss but also loss of income loss especially when existing jobs are not enough to absorb labor. Even if labor-displacing technological change occurs alongside creation of new tasks, movement of workers from old, obsolete jobs to new tasks is not guaranteed. First, it takes time for workers to acquire new skills and hence, to fit in new tasks especially when tasks require specialized skills. Second, the number of new tasks that can be created cannot also be guaranteed to match unutilized labor. What is more likely, however, with technological change is job polarization, i.e. the emergence of low skilled, low wage jobs that most likely belong to the informal sector.

The returns to technology will be captured by owners of capital. Huge returns to capital because of technological change will reinforce existing income inequality unless corrected (Korinek and Stiglitz, 2017). High levels of income inequality can be damaging to society and this has been explored widely in the literature. Without appropriate intervention to redistribute the returns to technology, the current trends in technology adoption under the fourth industrial revolution will certainly increase inequality in society.

Technological change, wages and labor share

The type of technological change occurring is difficult to determine. Moreover, existing data only points to its effects on wages, employment, and capital returns. However, these relationships can be used to infer what kind of technological change exists in an economy in general. This paper presents the results from an econometric exercise done to determine that relationship between technological change as represented by total factor productivity (TFP), and employment, wages and labor share to total output. The results presented here are obtained from fixed effects regression using firm-level data from the Annual Survey of Philippine Business and Industries (2013 – 2016). The econometric exercise yields three main results.

First, technological change has insignificant impact on employment. Technological changes in firms as measured by TFP does not affect the level of employment of firms, thus existing technology of firms do not cause labor displacement. However, this is not guaranteed to persist in the long run.

Second, technological change has positive impact on compensation. It is interesting to note that compensation expense of firms increase due to technology. Increase in compensation may be caused by improvements in productivity due to innovations in production.

Lastly, technological change reduces labor share of output. The output of firms is commonly measured as the sum of payments to labor (wages) and capital (rents). When labor share of output declines without wage cuts, then it must be the case that returns to capital are growing at a rate faster than that of wages. This result has long term implications on the level of inequality.

Addressing the negative impact of technology

Labor displacement and decline in labor share are often seen as natural outcomes of rapid technological change. Leaving the market on its own will not address inequality resulting from technological innovations. The state has an important role in determining the direction of technological change especially on how it affects society.

First, new tasks that emerge from new technology may require workers to acquire specialized skills. The state and intervene in this area by providing adequate support to workers as they undergo skills upgrading through access to trainings and income support for the unemployed.

Second, the state can encourage firms to adopt technologies that augment and complement with labor. Such technology will lead to increase in productivity of workers and at the same time, real wages.

Lastly, if inequality worsens because of huge returns to capital due to innovations, the state can correct such inequality through taxation. Technological changes occurred because society made investments in them, directly or indirectly. These investments may take the form of public goods that facilitate economic activities, or through an education system established by the state. Thus, society must also share in the returns to innovation.

COVID-19 Pandemic and Automation


Not only did the COVID-19 pandemic challenged the otherwise great performance of the Philippine, economy, it also forces firms and micro entrepreneurs to adopt radical changes on how they conduct economic activities. Technological advancements particularly in machine learning, artificial intelligence, and information and communication technologies will facilitate rapid adoption of new ways of doing business especially for firms that can afford them. However, given the huge economic losses resulting from lockdowns and work stoppage due to the pandemic, firms may find it sound to invest in these new technologies if it means fewer economic losses while the pandemic is ongoing.

The COVID-19 pandemic

The government imposed lockdown in mid of March 2020 to stop the spread of the virus. What was supposed to be a 2-day lockdown was extended to two months. Before May 2020 ended, the government started relaxing strict lockdown measures to allow some businesses to resume because the enhanced community quarantine imposed on most parts of the country caused huge economic costs. Cruz et al (2020) estimates that about 20 billion pesos are lost every day of lockdown. In 2nd quarter 2020, GDP declined by 16.5 percent, the largest economic contraction since the Second World War. Coinciding with the economic crisis is decline in employment by almost eight million in April 2020, and involuntary hunger reaching a new peak in six years.

The government allowed economic activities to resume gradually with caution because workplaces can become COVID transmission hotspots immediately. Recovery was not uniform. While some sectors can immediately resume with minimal changes in conduct of business, other sectors needed major changes. Experts from the University of the Philippines came up with classification of sectors based on how important they are in economic recovery and the risk that they transmit COVID. Among those that are of high risk are workers in retail and recreation, transport and logistics, and public works and construction. All these sectors are important in economic recovery, however, because they involve close physical interaction, they also display high propensity to spread COVID.

Technological change under the pandemic

Suspension of economic activities due to COVID has caused businesses to resort to technology to adapt. Retail, which is one of the sectors severely hit by the pandemic, has shifted online as more consumers embrace online shopping. The emergence of online retail platforms and the growing popularity of online payment systems facilitated the shift of retail activities online. The growth of online shopping also encouraged growth in logistics as the increase in online purchases created jobs in the form of door-to-door delivery services.

Recreation and entertainment will also be different. Theater houses and music halls can easily become COVID super spreaders so it is unlikely for the film, music and creative industry to return to traditional means of service delivery. Some of producers in the sector have started looking into online showing of films and music performances. The technology that enables such form of distribution is already existing and will improve continuously as more creators and producers utilize them.

Radical technological change is also expected to occur in the construction industry. Construction activities are known to employ huge number of workers. Because of this, the sector is also considered at high risk of spreading COVID. Major firms in the construction sector are already eyeing more prefabrication of building parts through the design for manufacture and assembly (DFMA) system. Under DFMA, activities in the construction sector will be split into two processes that take place separately: manufacturing of building parts and structure, and assembly on site. With this system, labor costs of construction firms will sharply fall because a significant portion of construction processes will be taken care of by manufacturing and only the only tasks left for firms are those that involve assembly. The DFMA method is highly appropriate and will address the current challenges of the construction sector under the pandemic. Manufacturing of building parts and structure will greatly benefit from developments especially in 3D printing. Outsourcing tasks to manufacturing will reduce risks of COVID transmission in construction because physical contact will be reduced.

The employment challenge

Technological changes because of the pandemic are inevitable for adaptation and survival of firms and economic activities. However, they come at a cost especially to workers. The abrupt shift online will significantly reduce the number of workers employed especially in sectors such as retail. The adoption of new construction techniques will also leave many workers unemployed if they cannot be absorbed by new jobs. Although there will be job losses, there will also be new jobs created, although they will likely require new set of skills.

Skills upgrading is more important than ever for workers to be able to take on new jobs. The COVID-19 pandemic will accelerate technology adoption and automation, and unless workers are equipped with necessary skills, rapid technological change will result in inequities especially because the jobs most exposed to automation and obsolescence are those that are routine and require low skill sets usually carried out by workers in lower income groups. The state has to step in to address the adverse implications of technological change by providing means for workers to acquire skills through trainings, basic income for those that will be displaced by technology, and encourage firms to adopt technologies that complement rather than substitute for workers.

1 Based on April 2020 Labor Force Survey results and SWS September 2020 survey.