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The Third Industrial Revolution – Potential Impacts of Technology on Employment

By Nouriel Roubini, Professor of Economics and International Business, Leonard N. Stern School of Business, New York University for WEF 

We are at the cusp of a third Industrial Revolution, with new technologies spawning a feverish excitement for a radical transformation in industrial production. Technological improvements in robotics and automation, as well as systematic changes in the economy that coincide with this revolution, will dramatically boost productivity and efficiency.

However, because advances in technology tend to be capital-intensive, skills-biased and labour-saving, there is a risk that machines will sharply reduce jobs throughout the economy over time. Enlightened solutions to the challenges the third Industrial Revolution presents must first seek to ensure that technology benefits a broader base of the population through education and providing workers with the necessary skills. That most fragile balance – between the freedom of markets and the prosperity of workers – must be sought and found.

Looking back at 2014, I see that a lot has changed in the world economy. For example, there is a new perception of the role of technology. Innovators and tech chief executive officers both seem positively giddy with optimism. New manufacturing technologies have spawned a feverish excitement for what some see as a coming revolution in industrial production. Yet, as we sit upon the cusp of a Third Industrial Revolution, it is not certain that the demand for labour will continue to grow as technology marches forward ‒ unless the proper policies to nurture job growth are put in place.

A Rather Shaky Foundation

In my view, the technological forces driving this revolution tend to have the following three downside biases. Advances in technology tend to be: capital intensive (favouring those who already have money and other resources); skills biased (favouring those who already have a high level of technical skill); and labour saving (reducing the total number of jobs in the economy). The risk is that workers in high-skilled, blue-collar manufacturing jobs will be displaced by machines before the dust of the Third Industrial Revolution settles.

For the last 30 years, emerging market economies in Asia have increasingly displaced the old industrial powers of Western Europe and North America as a base of production. Developed market economies have made up for those losses in manufacturing sector jobs through the service economy. In my view, however, there is no guarantee this positive scenario will continue.

Yet this is all just the tip of the iceberg. Whether it is retail, education, healthcare, government, or even transportation, a massive technological revolution will sharply reduce jobs over time.

The Coming Manufacturing Revolution

In the years ahead, technological improvements in robotics and automation will boost productivity and efficiency, which will translate into economic gains for manufacturers. For instance, the quick growth of smart software over the past few decades has been perhaps the most important force shaping the coming manufacturing revolution. This and 3D printing technologies will open the door to advances in manufacturing that have never before been possible. Highly skilled jobs will be created for those educated enough to participate in the new tech-savvy manufacturing world. However, for those workers not fortunate enough to participate in these gains, it may feel as though the whole revolution is happening elsewhere.

It Is a Small Step from Offshoring to Automation

Another trend that may result in a decrease in service-sector jobs is something we might call “the offshoring pathway to automation”. Today, for example, a patient in New York may have his MRI sent digitally to, say, Bangalore, where a highly skilled radiologist reads the scan at a quarter of the cost of what a New York radiologist earns. How long before a computer can read those images faster, better and cheaper than that Bangalore radiologist can?

Humans Need Not Apply?

The Third Industrial Revolution also coincides with other systemic changes taking place in the economy. For instance, a revolution is also under way in education, which is currently a very labour-intensive field. With the growth of ever-more sophisticated online courses, will we still need hundreds of thousands of teachers in the decades to come? And what will all those former teachers do to earn a living instead?

Governments are shedding labour too, particularly governments burdened by high deficits and debts. The e-government trend can also lead to labour savings in the way in which government services are provided to the public.

Even transportation is being revolutionized by technology. In a matter of years, driverless cars − courtesy of Google and others − may render the job of a driver or chauffer obsolete.

Will There Be a Green Revolution?

Of course, there are more optimistic sides to this story. The green revolution in technology is a perfect example. These new technologies carry with them the promise of cleaner and more efficient energy. This objective, of course, could not be more crucial.

The Past as Prologue: The Search for Solutions

The past can help to serve as a model for the future. This is not, after all, the first time we have faced such problems. At the end of the 19th and the beginning of the 20th centuries, world leaders had to face the horrors of industrialization. Child labour was abolished throughout the developed world, work hours were made humane, and a social safety net was put in place to protect both vulnerable workers and the larger (often fragile) economy.

As we begin the search for enlightened solutions to the challenges that the Third Industrial Revolution presents, some overall themes begin to emerge. The first and most important characteristic is that the solution must channel the gains of technology to a broader base of the population than it has done so far. To make that happen, the solution must have a major educational component. To create broad-based prosperity, workers need the skills to participate in the wealth that capitalism generates.

Workable solutions must address the world as it is, not as we wish it to be.

That most fragile balance − between the freedom of markets and the prosperity of workers − must be sought and found.

The article first appeared in WEF

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