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.

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.

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.