The Future of Work Depends on Inclusive Growth

December 18, 2017

by Yuwa Hedrick-Wong

The diminishing role of manufacturing in job creation means we must look to new pathways for moving people from poverty to prosperity.

In “Janesville: An American Story,” Amy Goldstein writes about the impact on the people in Janesville, Wisconsin, when General Motors closed its assembly plant there in 2008. The book was chosen as the 2017 Financial Times and McKinsey Business Book of the Year. Goldstein’s reporting on the grim reality of widespread job loss that tore the guts out of a small town clearly touched a raw nerve in the wider collective anxiety about the future of work.

The debate about the future of work and its impact on our economy, society and way of life is intensifying. The senior fellows of the Mastercard Center for Inclusive Growth met recently to discuss technological changes and their far-reaching social, political and economic implications. It is clear that technology will continue to substitute workers in both routine manual and cognitive tasks with ever more capable robotics and algorithms amplified by artificial intelligence.

Technology hits some harder than others

The impacts on employment and income will be uneven. As Laura Tyson, distinguished professor of the Hass Business School, University of California, Berkeley and a senior fellow with the Center, said, “The resultant dislocation and transition costs associated with technological changes have fallen unevenly on sectors, workers, communities and nations.” In this context, advancing inclusive growth is a precondition for the future of work.

For example, manufacturing jobs have been particularly hard-hit by technology. In the United States, manufacturing’s share of total employment has fallen by about two-thirds in the last 50 years, caused mostly by technological changes as opposed to trade and globalization. Robert Lawrence, professor of international trade and investment at Harvard University and senior fellow at the Center, observed, “Rapid productivity growth [from technology] combined with sluggish demand for goods compared with services is what has led to manufacturing’s declining shares of jobs.”

Technology’s dominant role in the decline of manufacturing employment is also apparent in countries such as Germany and Japan, where manufacturing’s share of total employment declined by around 40 percent since the 1970s despite their persistent manufacturing trade surpluses.

Men without a college degree have also been unduly affected. In 1964, 36.6 percent of U.S. men without a college education were employed in manufacturing. By 2014, that share was down to 10.1 percent. For these men, manufacturing was their best chance of earning a middle-class income and thus, its collapse has been devastating.

Middle-tiered jobs have been hollowed out

In a series of ground-breaking research papers, Lawrence examines how and why manufacturing is changing and what are some of the critical consequences.

A key insight: the shock from the current wave of technological changes in developed countries is not from a net loss in jobs, but from its effects on workers in the middle 80 percent of the skill spectrum.

New technologies typically increase demand for skilled workers while substituting the unskilled. At the same time, new technologies increase productivity. A more productive economy means higher income in the aggregate, which generates more demand for goods and services in the economy, leading to stronger job creation. In this context, even automation would create more jobs for people.

Workers in the middle of the skill spectrum are being replaced by robotics, algorithms and automation even as more jobs are created at the high and very low ends of the skill spectrum. For the vast majority of the affected workers in the middle, they have nowhere to go but to low end services jobs with substantially reduced pay, benefits and job security. Compounding their difficulties is that many of these workers are older, less mobile and living in communities that are heavily affected, like Janesville, where they compete for new jobs with many like themselves.

Technology could truncate manufacturing’s economic boost in developing countries

For workers in developing countries, the current wave of technological change is equally unsettling. The manufacturing sector has played a crucial role in rapid industrialization as well as inclusive growth, first for early industrializers in the West, then for once-poor countries in East and Southeast Asia and most recently China. But the heyday of fast-tracking economic growth through manufacturing seems to be over.

Lawrence’s research shows that the peak share of manufacturing employment has been declining in developing countries, while providing less of an overall boost to incomes.

In the United States, when manufacturing employment in the US peaked at 25 percent in 1953, per capita income was about $18,000. In contrast, manufacturing’s share of employment peaked in South Africa and Brazil at 17 percent (in 1981) and 15 percent (in 1986), respectively, when their per capita incomes were approximately $11,000. Even China, the undisputed heavyweight manufacturing champion, saw its manufacturing employment peak at 19 percent in 2010 when its per capita income was only $9,876.

When manufacturing employment peaks at lower per capita income, then it means manufacturing is losing its power to drive inclusive economic growth. Thus, for developing countries today hoping to replicate East Asia’s economic development success, the prospect has certainly dimmed.

Inclusive growth is imperative

The diminishing role of manufacturing in job creation in developing countries means that their vast numbers of underemployed and unemployed will have to struggle a lot harder for a job that pays a living wage. This will make poverty alleviation all the more difficult. Thus, while the current shock wave of technological changes has worsened inequality in many developed countries, it is simultaneously making it harder to reduce inequality in the developing world.

Inclusive growth has always been important, but it is now more important than ever. In a world where technological changes are rapidly and continuously reinventing how work is being done, workers need to reinvent themselves to stay productive and relevant. They cannot do so without inclusive growth. To reinvent themselves, workers must be able to access information and resources that allow them to acquire new skills, enter new job markets and secure products and services that help stabilize their otherwise dislocated and changing lives. Overcoming barriers to such access is inclusion in action.

As Ricardo Hausmann, director of Harvard’s Center for International Development and a Center senior fellow, pointed out, “Over the course of history, it has always been easier to think about jobs that are disappearing than to imagine new jobs that will be created by the new technological possibilities.”

Advancing inclusive growth means focusing on the new possibilities. Whether in Johannesburg, Mumbai, or indeed, Janesville, it is nothing less than a precondition for the future of work for all, not just the lucky few.

Suggestions for further reading:

Amy Goldstein, Janesville. Simon & Schuster. 2017.

Dani Rodrik, “Premature deindustrialization”. Working Papers 20935, National Bureau of Economic Research. February 2015.

David Autor and Anna Salomons, “Does productivity growth threaten employment?” Paper prepared for the ECB Forum on Central Banking, June 2017.

David Autor and David Dorn, “The growth of low-skill service jobs and the polarization of the US market”. American Economic Review, 103(5): 1553-1597.

Didem Tuzemen and Jonathan Willis, “The vanishing middle: job polarization and workers’ response to the decline in middle-skill jobs”. Economic Review, Federal Reserve Bank of Kansas City, 2017.

Laura Tyson and Michael Spence, “Effects of technology on income and wealth inequality”, in After Piketty: The Agenda for Economics and Inequality. Edited by Heather Boushey, J. Bradford DeLong, and Marshall Steinbaum. Harvard University Press. 2017.

McKinsey Global Institute. A Future that Works: Automation, Employment and Productivity. January 2017.

Ricardo Hausmann, “Making the future work for us”, Project Syndicate, September 29, 2017.

Robert Lawrence, “The diminishing role of manufacturing as source of inclusive growth: the experience of emerging economies”, working paper, 2017.

Robert Lawrence and Daniel Lashkari, “Manufacturing and inclusive growth: the experience in the rest of the world”, working paper, 2016.

Robert Lawrence and Lawrence Edwards, “US manufacturing and inclusive growth”, working paper, 2015.

Featured Photo Credit: Getty Images

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