Does technological innovation increase

unemployment?
Nobel prize-winning economist Joe Stiglitz has a new NBER paper out that comes to a
worrying conclusion the robots really are coming for your job.
In economic theory innovation should make workers more efficient they can produce
more for less but it comes at the cost of lower skilled jobs as fewer people are
required to produce the same amount of output.
However, (again in theory) the gains made by workers who remain in employment
should be greater than the losses incurred by those who lose their jobs and their gains
help drive more skilled job creation in other industries.
Unfortunately theory doesnt always fit neatly when confronted by reality. And Stiglitz
claims this is exactly what has happened with innovation. As he puts it (emphasis
added):
The statement that such skill-biased innovation could be welfare enhancing is
usually taken to mean that the gains of the skilled workers are more than sufficient to
compensate the losses of the unskilled workers. But while the skilled
workers could compensate the unskilled workers, such compensation seldom occurs.
Stiglitz argues that truly disruptive innovations, of the kind that drove the Industrial
Revolution, require widespread economic restructuring to allow those who are being
pushed out of an industry to locate alternatives. Sadly, he says, markets often do
not manage such restructurings well leading to long periods of high unemployment and
increased inequality.
The economist claims that these market failures helped create the conditions for the
Great Depression. Banks and businesses failed to anticipate the collapse of rural
workers incomes driven by technological changes in the farming sector in the 1920s.
The legacy of this was a debt overhang that prevented these workers from moving to
cities in order to gain new skills and ultimately caused a crash in demand.

If left unchecked, the decline in manufacturing during the present era could be having a
similarly worrying impact. Worse, without government introducing policy to counteract
the impact of labour-saving innovation low income workers could end up being worse off
even in the longer run with lower wages and higher unemployment concentrated
among some of the most vulnerable groups in society.
Indeed this may help explain why wages of low-skilled workers in the US have
stagnated for more than 40 years.
For more than a century the Luddites, who believed that modern machines would lead
to unemployment and impoverishment, have been held up as an example of how smallminded traditionalists hold up social and economic progress. In short, Stiglitzs message
is that they were in fact right.
Published in collaboration with Business Insider
Author: Tomas Hirst is a political reporter for Business Insider UK.
Image: A car manufacturing plant. REUTERS