Technology, Automation, and Innovation Create, Not Destroy, Jobs

bridges, vol. 33, May 2012 / Innovation Matters
By Stephen Ezell

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Ezell Stephen

Election season is coming again to Washington – in the midst of a fragile economy that has seen US unemployment rates remain stubbornly high. In fact, the Congressional Budget Office reported in February 2012 that with three years of unemployment topping 8 percent, the United States has seen the longest period of high unemployment since the Great Depression; yet unemployment is expected to remain above 8 percent through 2014. In such an environment, it's no surprise that elected officials are looking for culprits to blame for these persistently high unemployment rates, and many have turned to a familiar bogeyman: technology, automation, and innovation.

None other than President Obama, during an interview with Ann Curry of NBC's Today program on June 14, 2011, suggested that technology and automation were in part responsible for the US economy's sluggish job growth. The President explained that, "There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don't go to a bank teller, or you go to the airport and you're using a kiosk instead of checking in at the gate."

Unfortunately, such pronouncements are part of an all-too-familiar meme among elected officials in the United States and, indeed, around the world. I have even been in rooms on Capitol Hill with US Representatives who have said, "Innovation? We don't need more innovation. Wasn't it financial innovation that got the United States into this economic and unemployment crisis in the first place?" But even putting aside the fact that so much of what passed for "innovation" on Wall Street over the past decade was in reality casino gaming – shifting money around – or outright fraud, rather than true wealth-generating innovation that produced real value for the economy, this fear that technology, automation, and innovation destroys jobs has a long history in the United States.


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For example, when factory automation took off in the late 1950s and early 1960s, increased national concern centered on the employment effects of automation and productivity. So great was the concern with automation and the rise of push-button factories that in 1955 Congress's Joint Economic Committee held extended hearings on the matter. John Kennedy created an Office of Automation and Manpower in the Department of Labor in 1961, identifying "the major domestic challenge of the Sixties: to maintain full employment at a time when automation, of course, is replacing men." Such fears entered the popular consciousness, with one particularly telling episode of The Twilight Zone depicting a dystopian world in which a manager replaces all his workers with robots and, in the final scene, is replaced by a robot himself.

Some, echoing the President, suggest even greater cause for concern today: With technology now displacing jobs not only in agriculture and manufacturing but also in the service sector, there will be no new job-generating growth sectors to employ those who lose their jobs. Economist and author Jeremy Rifkin argues that when millions of retail jobs are displaced by e-commerce, and a host of other service-sector jobs undergo digital automation, there will be no new jobs to replace them. If we boost productivity in the retail, banking, insurance, and other service sectors that have been job generators until now, where in the world will people find work?

Such views fail to recognize that while technology, automation, and innovation do indeed destroy some jobs in the short term, they generate far more jobs, especially over the medium to long term. For instance, the McKinsey Global Institute has found that for every job the Internet has destroyed, it has created 2.6 jobs. In fact, the Internet itself has accounted for 21 percent of the economic growth over the past five years in the world's 13 largest economies. The United States has also created 566,000 new jobs in mobile and online applications development over the past five years – a type of job that didn't exist a decade ago. It's this kind of dynamic churn – the obsolescence of old jobs and industries and the creation of new ones – precisely the "creative destruction" of which Schumpeter spoke, that lies at the very center of economic growth. Indeed, as ITIF explains in a report called Embracing the Self-Service Economy, the vast majority of economic studies show that productivity gains – including those achieved through self-service technologies such as ATMs, kiosks, and self-checkout machines – actually lead to more jobs and economic growth. In fact, if self-service technologies were more widely deployed, the US economy would be approximately $130 billion larger annually, the equivalent of an additional Embracing the Self-service-economy$1,100 in annual income for every household.

The view that self-service checkout scanners at grocery stores, for example, will destroy jobs misses the fact that savings from a more efficient industry (in this case the grocery industry) would flow back to the economy in one or more of the following ways: lower prices (lower cost for groceries), higher wages for the remaining employees, or higher profits. In a competitive grocery retail market, most of the savings would flow back to consumers in the form of lower prices. Consumers then use their savings on lower-priced groceries to go out to dinner a few times, buy books, watch movies, or any number of other things. This economic activity stimulates demand that other companies (e.g., restaurants, book stores, movie theaters, airlines, hotels, etc.) respond to by hiring more workers.

This observation is borne out by many economic studies. Economists at the Federal Reserve write that, "Productivity grew noticeably faster than usual in the late 1990s, while the unemployment rate fell to levels not seen for more than three decades. This inverse relationship between the two variables [technology and unemployment] also can be seen on several other occasions in the postwar period and leads one to wonder whether there is a causal link between them. The empirical evidence presented here shows that a positive technology shock leads to a reduction in the unemployment rate that persists for several years." Thus, technological-based productivity gains are not the culprit in recent sluggish US job growth.

Likewise, in a definitive review of the studies on productivity and employment, the OECD's Jobs Study: Facts, Analysis, Strategy report stated that, "Technology both eliminates jobs and creates jobs. Generally it destroys lower wage, lower productivity jobs, while it creates jobs that are more productive, high-skill and better paid. Historically, the income-generating effects of new technologies have proved more powerful than the labor-displacing effects: technological progress has been accompanied not only by higher output and productivity, but also by higher overall employment."

The problem for the US economy – and the global economy, for that matter – is not that we have too much innovation; rather, we don't have enough of it. What's needed is not for the political class to denigrate technology, automation, or innovation, but to enact more aggressive innovation-supporting policies: everything from more generous R&D tax credits and greater federal investment in R&D to better education policies. Moreover, the United States should adopt principles from the "Flexicurity programs" in place in countries like Finland and Sweden, which feature comprehensive lifelong learning strategies to ensure the continual adaptability and employability of workers; effective active labor market policies that help people cope with rapid change, reduce unemployment spells, and ease transitions to new jobs; and modern social security systems that provide adequate income support, encourage employment, and facilitate labor market mobility. Ultimately, there is "no way around innovation" – for countries, companies, or even individuals. The nations that will do best in the intensifying global race for innovation-based economic growth are those that embrace both innovation and creative destruction, while also putting in place effective public policies that empower society to cope with the rapid and ongoing changes brought by technology, automation, and innovation.

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The author, Stephen Ezell, is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF), with a focus on international information technology competitiveness and national innovation policies.

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