Worker Displacement and Productivity in the New Economy

Digitalization and technological advancement are revolutionizing the economy and stirring up a whirlwind of debate among policymakers. Firms and individuals harnessing the power of technology benefit more than those that fail to adapt. As workers face uncertainty due to displacement, policymakers must weigh the societal gains of technological progress and automation to the negative and immediate effects on the labor market.

In particular, these growing pains will focus on blue-collar, middle-skill jobs.  Workers in these occupations may find themselves at a disadvantage because they lack the necessary skills to transition into occupations in the digital age. However, it is important to note that both employers and employees benefit from technological advancement. In addition to the improvement of federal programs, firms must join the federal government and invest in the workforce to counter the digital skills gap.



Automation simplifies tasks typically completed by workers. Policy experts suggest that 30 percent of tasks of 60 percent of jobs could be automated, but less than five percent of occupations actually qualify for complete automation.

Notably, automation leads to a reduction in employment for certain occupations. Research holds automation partially responsible for the decrease in manufacturing jobs from 31 percent to 16 percent between the years 1967 and 2007 as well as the loss of 1.4 million jobs between December 2007 and January 2016 in the administrative sector. Similarly, automation contributed to the decrease in farm employment from 40 percent in 1900 to two percent in 2000 and in manufacturing employment from 25 percent in 1950 to less than ten percent in 2010. With respect to those that lost their jobs, technologies are more critical, accurate, and efficient in executing certain tasks — and it is generally a positive economic outcome that society is no longer predominately agrarian.

On a more positive note, evidence suggests that automation creates more jobs over time than are initially foregone. Research reports that the United States Bureau of Labor Statistics projects the emergence of millions of new jobs from 2012 to 2022 in the fields of social assistance and health care (5 million), professional services (3.5 million), construction (1.6 million), leisure and hospitality (1.3 million), state and local government (over 900,000), finance (750,000), and education (675,000).


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The increase in jobs within these sectors is due to the demand for crucial tech-based skills. Whether or not that future is obtainable depends on the ability of workers to acquire the necessary skills to adapt. To further complicate, the American Dream is increasingly less attainable solely through grit alone. Work ethic and sweat are not enough. To qualify for these jobs, workers require certain skills that they do not possess and may not be able to independently acquire. Transcendence into a modern-day Luddite uprising against machines and massive displacement is likely not around the corner. But policymakers must carefully consider labor market effects and provide policy solutions that address the displacement of workers.

Digitalization, technological advancement, and automation change the demand for skills in the labor market. Middle-skill occupations that do not historically require digital literacy now do. According to a study of job postings, about eight in ten middle-skill jobs require digital skills — and these occupations grow faster and maintain higher earnings than other non-digitally skills-based occupations. In some of the most urbanized cities in the United States, an overwhelming majority of middle-skill jobs require digitally intensive training. Workers without those skills must adapt to labor market demands or accept less well-paying jobs or even unemployment.

Despite the compelling incentives to adapt, there are many unfilled occupations in the labor market. Employers are unable to find candidates with the necessary technical skills to fill these jobs. Survey research suggests that almost 40 percent of employers reported difficulty in filling middle-skill occupations requiring digital skills. An analysis of human resource (HR) departments finds that 56 percent of 800 HR departments experienced difficulty in filling middle-skill jobs, of which finance, insurance, and healthcare industries report the highest difficulty. Since firms are unable to fill these positions, productivity, growth, and revenue suffer.

Evidence suggests that automation and technology increase the efficiency of the productive processes and business practices. The incentives are huge and some firms are massively investing in technology. While an estimated 167 billion dollars in ownership of computer capital was reported in 1996, the threshold of the technological revolution, the value might be somewhere close to a whopping 1.67 trillion dollars of technological and digital assets. This increase demonstrates a unique aspect of this new era: value is not only stored in the actual physical technology, but also the nonphysical aspects that exist in the digital world. In other words, digital capital is not just the computer, but all the files, blogs, e-mails, and databases that are stored in the computer.

Investments in technology increase payoff through maximized production efficiency. An analysis by the researchers Erik Brynjolfsson and Shinkyu Yang of valve-manufacturing plants in The Quarterly Journal of Economics reveals that automation reduces the time to complete tasks in relation to setup, execution, and inspection because machines (1) do the productive work for actually producing the valves and; (2) do the unproductive work for quality control. The implementation and usage of electronic and digital management systems increase business capacity and productivity. For example, productivity capacity for trucks in the trucking industry increased by 13 percent from the implementation of electronic vehicle management systems.

Small businesses that use cloud technology grow 26 percent faster and generate 21 percent higher profits. Benefits from the investment in technology that automate general tasks are also more recognizable in long-term than the short-term. The effects of computerization on productivity and output indicate that computerization’s contribution to productivity and returns is exponential — two to five times larger in the long-run than short-run.



While there appear to be negative labor market outcomes for blue-collar workers given the increase in technology and automation, such advancements are beneficial to society. And further, the effects on blue-collar workers are not without a cure. Retraining the workforce and preparing younger generations for the future is key to rectifying the negative effects of automation and technological advancement on workers.

Current efforts by the United States government intend well but are insufficient. The largest federal government workforce training program only trains about 175,000 individuals per year and spends hardly 0.1 percent of GDP on labor market programs and policies. The Obama Administration made great strides in labor market training programs through investments in skill training programs for over half of the United States’ community colleges — but only about 300,000 individuals over eight years directly benefited from these endeavors. The Obama Administration also invested in apprenticeships. Throughout 2015 and 2016, the Obama Administration allocated over $200 million to support and expand apprenticeship programs.

Given the government’s constraints to deal with labor market effects alone, businesses are urged to take the lead through supply chain management principles. Standard Motor claims reducing unfilled positions from 50 percent to 10 percent through concentrated recruitment efforts through community college. Unfortunately, many other businesses do not invest in community colleges and training programs like Standard Motor. Barely 25 percent of respondents to the 2013-2014 Harvard Business School survey reported that their firms cooperate with community colleges and subsidize worker training. However, firms such as Accenture that participate in robust worker training programs onboard new employees more effectively and fill positions at higher rates.

While technological advancement and automation are beneficial to society, worker displacement is a solvable problem. Automation simultaneously eliminates old jobs and creates new ones. The creation of new occupations has changed the demand for skills in the labor market. Many new occupations require digital literacy and individuals in the labor market find it in their best interest to adapt. Worker displacement should not frighten people from embracing automation and technological advancement in the digital economy. Automation increases productivity and creates an overall more efficient and better society. The Obama Administration made strides but there is still more that the government can do to bolster workers and firms in the new economy. Business must also assume responsibility and invest in the workforce. This includes investing in local community colleges and internal mobility programs to create a pool of better-trained workers. The United States should not backpedal from technological change because certain occupations disappear. Rather, the government and firms should increase efforts to include displaced workers into the benefits of the new economy through more innovative and stronger training programs and investment.

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