Job insecurity a hallmark of the globalization

Robert J. Shiller, Professor of Economics, Yale University, Project Syndicate

Insecurity about jobs is a defining characteristic of our age. Two worries arise most often: Globalization, which makes jobs migrate to poorer regions, and computer technology, which can make them disappear altogether.

These worries plague people of all incomes, ages, and in all countries. As shown by Mexico's laments about job losses to China, people in emerging countries worry as much as those in advanced countries. In response, politicians propose various job retraining or education programs, but rarely confront the real long-term issues.

Worries about globalization and the computer revolution ultimately boil down to the same thing, because globalization is mostly a consequence of new information technology. Computers and the Internet made it possible to send information almost costlessly, and to do business across cultures and continents.

The worry is that information technology is now on the bend of a "hockey stick" curve, where it will suddenly take off at much greater speed than before. The resulting changes will not all be welcome in economic terms.

Hockey stick curves often occur in nature. Exponential growth at a fixed percentage rate can look like a hockey stick. Five percent per year of US$1 is only five cents, 5 percent of $10 is only 50 cents, and the curve appears flat for a while. But then the growth becomes massive: Five percent of a billion is $50 million.

Information technology is growing at a faster pace than 5 percent. According to "Moore's Law" -- named after the president of Intel, who formulated it in 1975 -- the amount of components on a computer chip doubles every two years. That is about a 40 percent annual growth rate. The economic impact of such an exponential growth path, starting from small beginnings and viewed over decades, will certainly look like one very large hockey stick.

Fears about computers eliminating jobs are, of course, not new. Fifty years ago, Norbert Wiener of MIT, a great 20th century mathematician and pioneer of computer science, warned of the threat that computers posed to jobs.

The economic problems that Wiener worried about have not materialized so far. A half-century later, nothing really bad happened to any major segment of our population that can be blamed on computers. But that is because computers started from small beginnings, so that we have up to now only been on the flat part of the hockey stick. Now that a critical mass has been reached, will we see a dramatically different effect on employment?

Of course, on average, advances in computer technology must be good news. Not only are computers productive, but they serve people, rather than being their competitors. Powerful new computers will make the human race as a whole better off. The problem is that real people are not just "average," so the real question concerns how the benefits derived from computers are distributed.

The core problem with information technology is that its economic benefits might be concentrated and that the wealth it creates may accrue predominantly to people who have subtle skills that computers can't duplicate, or who have the first-mover advantage, or who have the right business connections.

Older information technology has already created "winner-take- all" effects in some occupations. Phonograph records (an early example of information technology) created musical superstars who sell their services to millions of people, putting out of business countless local performers who found their talents obsolete. Television (another older form of information technology) did the same thing for actors and athletes.

But phonographs and television are limited compared to what is possible now -- or may be possible soon. In the new economic world, many more occupations may follow the route of discarded local musicians, resulting in wealth concentrations on a vastly greater scale than before.

The risks created by computer technology are real and frightening. They will not be seriously changed by retraining and reeducation programs, which will not give most people the skills they need to remain more efficient than the new machines. Instead, these risks must be dealt with by fundamental changes -- changes that will not make individuals more productive than machines, but will allow society to manage risks better and to redistribute them.

For example, as the difference in rewards provided by the market to those with and without special skills grows, a progressive tax system to subsidize low-wage jobs becomes more necessary. Other likely steps include broadening the scope of private insurance policies, so that they cover some risks that generate inequality, such as the loss of the market value of human capital or of one's home.

Borrowing and lending institutions will need to change, so that they better cushion people against the risk of personal bankruptcy. Financial markets will have to be broadened, so that people and businesses can better hedge their risks.

It is important to start thinking about what changes lay ahead, because it may be harder to agree later on. As long as people remain under a relative "veil of ignorance," in the sense that they do not yet know how they will personally be affected, they may find it easier to agree that progressive taxes should be used to subsidize low-wage earners. When greater income inequality is a fait accompli, principled discussion may give way to naked class struggle between the new super-rich and those who have only their misery to lose.