Chart of the week – Automation and the future of jobs

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Andrew G. Haldane, the Bank of England’s (BoE) Chief Economist, gave a fascinating speech on 12 November 2015 on how he and researchers at the BoE see the advance of technology potentially affecting conditions in the labour market in the coming years.

As in the past, technology is changing the quantum and nature of work. The question Andy Haldane asks is whether this time technology, and in particular automation, may change jobs and wages more fundamentally than in the past. He evokes the “persuasive picture of robot-fuelled growth in productivity” painted by the books Race Against the Machine and The Second Machine Age (by Eric Bryngjolfsson and Andrew McAfee). According to this thesis, modern day smart machines, “jet-propelled by modern computing are different and have the potential to substitute for human brains as well as hands.”

If we are on the cusp of a fourth industrial revolution (in which new-age machines will be “thinking as well as doing, sensing as well as sifting, adapting as well as enacting”) concludes Haldane, then there be a permanent re-shaping of the labour landscape rather than a re-run of the 19th century, when productivity gains boosted wages and labour’s share of income.

The BoE has pursued research seeking to assign probabilities to the likelihood of certain classes of job being automated in the UK over the course of the next few decades. The research suggests that as many as 15 million jobs could be automated in the UK as technological advances are implemented in the years ahead.

Exhibit 1 below ranks job types by their median wage rate and plots this against their probability of automation. It shows that those jobs at the most risk from automation tend, on average, to be low-paid jobs. So automation has the potential to act as a regressive income tax on the unskilled and thus further widen income disparities.

Exhibit 1 : Average probability of automation by occupation AutomationEN

Source: The Bank of England, BNP Paribas Asset Management, as of 12 November 2015

If automation does displace the numbers of jobs envisaged by the BOE’s research there will be profound consequences for labour markets, namely:

– An increased risk of large scale un- or under-employment
– Greater inequality as wage differentials rise between a high-skilled elite and everybody else
– Labour’s share of national income declines

Haldane offers the following longer-term solutions for public policymakers to consider:

Relax: The future may be shorter working weeks but work of course delivers non-pecuniary, as well as pecuniary, benefits
Retraining workers: To focus on developing the core cognitive competences (reading, writing, arithmetic) may be misplaced in a world where smart machines are surpassing human skills. Non-cognitive skills (for example: self-confidence, self-esteem, relationship building, negotitation skills, empathy) will likely be more important in an automated world
Redistribution: If, in the future, the gap between skilled and unskilled workers does widen significantly then a rethink may be required on the relative roles of capital and labour. A tilt in the balance of power in favour of capital could prompt changes in corporate governance Haldane sees signs that such changes are already underway.

Andrew C. Craig

Head of Financial Market Analysis & Publications

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