JOBS NOTES Issue No. 2 THE FUTURE OF WORK REQUIRES MORE, NOT LESS TECHNOLOGY IN DEVELOPING COUNTRIES KEY MESSAGES ¬ Digital technology is transforming the organization ¬ But technology also creates opportunities and location of production, and thus the future (leapfrogging), to generate jobs, increase earnings of work. and be more inclusive. ¬ It risks widening the gap between richer and ¬ To take maximum advantage and counter the developing countries, and between the better threat of rising global inequality, developing skilled and connected and the poorer population countries need to: (1) address bottlenecks in groups within countries, who stand to bear the technology access; (2) invest in skills and (3) brunt of the adjustment. create an enabling environment. Digital technologies such environment to benefit from  it, while at the same as robotics, information time bearing the brunt of the risks. There is a funda- and communication mental danger that inequality will deepen, across technologies (ICT), and and within countries, undermining the prospect artificial intelligence, of globally shared prosperity itself. Much of that will transform the world prospect will depend on what will happen to the of work. They improve patterns of employment and whether developing labor productivity, lower transaction costs, and reduce countries will be able to harness and share the job barriers to market entry. This will in turn accelerate opportunities and benefits technologies present. innovation, possibly inducing a virtuous circle of This note reflects on the implications of techno- economic opportunity, growth and prosperity. Yet technology also changes the types of skills that logical change for developing countries. Most of employers demand, the relationships between the discussion so far has concentrated on the labor employers and workers, and the trade flows between consequences for the developed world. Yet, to reach countries. This, in turn, risks causing disruption, posing the twin goals of eradicating extreme poverty by 2030 a threat to those too slow to or unable to adjust. and fostering globally shared prosperity, developing countries will need to vigorously address bottlenecks Richer countries, and the better skilled and better in technology access, and invest in building the skills connected population groups within countries, and an enabling environment to take maximum stand to benefit most. But developing countries, advantage of the opportunities technology offers. and especially the poorer segments of the popula- This must happen while ensuring that the poorer and tion within them, often do not have proper access vulnerable groups—the bottom 40 of the income to digital technology, nor the skills or enabling distribution / B40—are not excluded from the process. 1 THREATS AND OPPORTUNITIES Automation, for example, expands the range of tasks that machines can cover and the precision Digital technology directly and indirectly affects the with which they do so. This makes it technically, economic parameters that shape the organization and if the prices come down sufficiently, also and location of production and exchange, and economically feasible to replace labor, with robots thus the world of work. By facilitating automation, no longer taking over only routine non-cognitive, connectivity and market entry, it changes the price of but also routine, cognitive tasks. This reduces the capital versus labor, the fixed cost of production, the number of available low and medium skilled jobs, at cost of transacting, and the speed of innovation. This home, but possibly also abroad, through reshoring. fundamentally changes the organization and location Automation can also augment labor, such as robots of production and exchange, and thus the quantity, assisting surgeons (implying higher earnings),1 and quality, and distribution of jobs. The effects can be give rise to new products, firms and jobs, such as positive or negative (Table 1) and may be felt directly, computer animation.2 by substituting or complementing labor, or indirectly, at another location, through trade. Table 1 The Dimensions of Digital Technologies’ Impacts on Jobs Positive effects Negative effects Quantity of jobs Access to markets and resources, due Susceptibility of today’s jobs increases, to improved connectivity, helps firms due to automation, as machines can grow and create jobs, or attract work to take on more tasks, or due to innovation new markets that are more competitive. reshaping industries and firms. Product innovations, created and The nature of jobs changes, as distributed using various technologies, technology reshapes and alters give rise to new industries, firms, connections among workers, work, and and jobs. employers. Quality of jobs Productivity increases due to the Workers bear more risk, as connectivity augmentation of workers’ capabilities reorganizes where work is done and by through automation lead to related whom, diffusing the traditional formal increases in wages and improvements employer-worker relationship. in working conditions. Wages stagnate or fall, as technology allows employers to automate or trade more tasks; this could lead to wage polarization and inequalities depending on task content of jobs. Distribution of jobs Inclusion of previously disconnected Exclusion or lagging participation workers, as connectivity and automation occurs, as workers, employers, and lowers search costs and helps workers economies could suffer missed overcome physical and social barriers; opportunities and degrading allows firms to overcome skills competitiveness. constraints to grow, creating jobs. 1 For example, the global automotive industry installed 98,900 robots in 2014. IBM’s Watson AI assists oncologists to diagnose lung cancer. Automation causes middle-skill job creation to stagnate and drives down wages. 2 Computer animation has created 80,000 jobs in India and 64,000 jobs in the U.S., but displaced traditional animator jobs. 2 ICT increases access to information, lowering trans- versus youth bulges, which affects the capital-labor action costs and facilitating trade. This increases price ratios; 2) the population’s skill mix and 3) the market scale and competition, opening up opportu- enabling business environment, including the reigning nities for new and better jobs.3 By introducing new labor market regulations and trading environment. economies of scale (as in platform economies, where As a result, the effects will differ between developed the benefits to users increase with platform size), it and developing countries, and between the skilled and may also induce new oligopolies and “winner takes connected, and the unskilled, poorer, and excluded most” competition, reducing the labor share in GDP populations within these countries. and thus the level of earnings.4 Digital technology can also reduce the fixed cost of production (for example, Perhaps the most talked about effect today, 3D printing), reducing economies of scale, and thus especially in developed countries, is the displace- the barriers to market entry.5 These processes accel- ment of labor, with technology substituting for erate innovation, in business processes and product human effort in some or most tasks, as the capital / development, possibly instigating new opportunities labor price ratio drops. The starker of these predic- and a virtuous circle of development. tions suggest that many occupations will be automated away, and job losses will be significant.6 The more The effects will differ across countries and popula- nuanced suggest that some occupations might be tion groups within countries. How these economic entirely susceptible to automation, but that more might forces play out across different countries and popula- be transformed as some share of tasks are automated tion groups within countries will further depend on or traded.7 The process also bears on the labor markets 1) the extent of technology diffusion, which in turn in developing countries. depends on the regulatory and infrastructural support The decline in low and middle skilled occupations as well as the demographic composition, such as aging in developed countries due to outsourcing of labor 3 Mobile phones ease farmers’ access to market information, improving earnings. Car sharing services link riders with underutilized drivers but put traditional taxis out of work. 4 While digital technologies often weaken the market power of long-standing incumbents, new oligopolies and rent seeking may also arise when there are important economies of scale such as with most platforms, whose benefits to users increase with size. New empirical evidence for the US suggests for example that the secular decline in the labor share of GDP is linked to the increase in “winner take most” competition, with a small number of highly profitable (and low labor share) firms commanding a growing market share (Autor et al., 2017). 5 3D printing helps manufacturers cut prototyping and testing costs. 6 Frey and Osborne (2013). 7 Arntz, M., T. Gregory and U. Zierahn (2016). “The Risk of Automation for Jobs in OECD Countries: A Comparative Analysis,” OECD Social, Employment and Migration Working Papers, No. 189, OECD Publishing, Paris. 3 intensive manufacturing (China) and more recently also growing inequality and migration between countries. routine services (India) from developed to developing Gaps in mean incomes already account for more than countries has been widely documented.8 It followed 80 percent of global income differences, with wages improved connectivity and trade liberalization and has between unskilled workers in rich and poor countries underpinned the labor-intensive export led develop- often differing by a factor of 10 to 1.11 ment model of many developing countries, especially The direct effects of automation on the demand for in Asia. It has also helped East and South-East Asia low and routine medium-skilled tasks in middle- and reduce extreme poverty.9 lower-income countries themselves may be limited for Yet following recent advances in automatization some time, as firms there are slower to adopt digital in the developed world, altering the capital/ technologies. Yet at least some workers and firms are labor price ratios again, reshoring of these tasks using such technologies to be more productive, have has started.10 This threatens to close the door for better access to markets, and become more innova- labor-intensive, export-led development as a pathway tive.12 Combined with the reshoring of some of these out of poverty. This is especially problematic for tasks to developed countries, and further off-shoring low-income countries with a youth bulge, as in most to lower-income countries, this is already introducing African countries. In the absence of clear alternative a decline in medium-skilled occupations in some development models, it also raises the specter of lower-middle-income countries and a polarization 8 Autor, David, H., David Dorn, and Gordon H. Hanson. “Untangling trade and technology: Evidence from local labor markets.” The Economic Journal 125.584 (2015): 621-646. 9 See, for example, Quibria, M.G. (2002). “Growth and Poverty: Lessons from the East Asian Miracle Revisited.” Asia Development Bank Research Paper 33. 10 See Kapoor, R. “Technology, Jobs and Inequality: Evidence from India’s Manufacturing Sector,” ICRIER, February 2016: http://icrier.org/pdf/Working_Paper_313.pdf 11 Branko Milanovic, 2012. “Global Inequality: From Class to Location, from Proletarians to Migrants,” Global Policy, vol. 3(2), pages 125-134, 05. 12 See http://www.theverge.com/2016/4/5/11367274/zipline-drone-delivery-rwanda-medicine-blood; http://www.digitaltrends.com/cool-tech/zipline-rural-medical-drone-delivery/ 4 of their labor market, raising the specter of growing workers from employers. With many social security inequality within countries (see Figure 1). benefits linked to traditional employment arrangements, workers may lose many benefits and protections. But the broader economic payoffs from adopting Given that informality is prevalent in the developing new digital technologies can also be large, given world, there is likely less of a direct concern about high transaction costs. Technology facilitates business workers losing full-time formal employment and and product development, providing opportunities the attendant social protections. In fact, the digital for new employment generation. The adoption of technologies that enable the gig economy could even mobile telephones and applications such as mobile foster transparency in the labor market about demand money and e-agricultural services are commonly cited and wages, for example, and create opportunities examples of such leapfrogging. Reduction in the fixed for workers to access markets far away. These cost of investment and technology adoption such as technologies have at times even empowered informal with 3D printing further reduces barriers to market workers in India and improved their ability to get wage entry, also enabling smaller firms to participate in raises.13 It does not do away, however, with the need production or distribution activities. This can increase to find alternative ways to provide social security, for labor productivity of skilled and unskilled individuals example through greater reliance on self-contributory in urban and remote areas alike. systems that delink social security provision from Digital technologies are also disrupting the traditional employment. But institutional leapfrogging may employer–worker relationships. They allow new facilitate the adoption of such alternatives. forms of work, such as the gig economy, and delink Figure 1 Labor Markets Might Be Polarizing 2 1.5 1 0.5 PERCENTAGE POINTS 0 -0.5 -1 -1.5 -2 -2.5 MACEDONIA, FYR PANAMA GUATEMALA PHILIPPINES SOUTH AFRICA HONDURAS DOMINICAN REP. TANZANIA UKRAINE UGANDA SERBIA BOLIVIA EL SALVADOR INDIA JAMAICA SRI LANKA EGYPT, ARAB REP. BHUTAN COSTA RICA KAZAKHSTAN NAMIBIA MONGOLIA GHANA PAKISTAN HIGH-SKILLED OCCUPATIONS (INTENSIVE IN NON-ROUTINE COGNITIVE AND INTERPERSONAL SKILLS) MIDDLE-SKILLED OCCUPATIONS (INTENSIVE IN ROUTINE COGNITIVE AND MANUAL SKILLS) LOW-SKILLED OCCUPATIONS (INTENSIVE IN NON-ROUTINE MANUAL SKILLS) Source: World Bank, World Development Report 2016, page 121 13 Siddhartha Raja, Saori Imaizumi, Tim Kelly, Junko Narimatsu, and Cecilia Paradi-Guilford. “Connecting to Work,” World Bank, 2013, page 23; available at http://documents.worldbank.org/curated/en/290301468340843514/pdf/809770WP0Conne00Box379814B00PUBLIC0.pdf 5 REINFORCING AND COUNTERACTING FORCES Digital technologies thus Figure 2 Divides Between Advanced and Emerging Economies (c. 2014) present both threats and opportunities for the employment agenda in THE DIGITAL DIVIDE developing countries. between advanced and emerging economies Yet many countries lack the means to take full advantage of these opportunities (see Figure  2), INTERNET USERS because of limited access to technology, a lack of 69% skills, and the absence of a broad enabling environ- 23% ment, i.e., analog complements.14 BUSINESS WEBSITE Technology access in the developing world often 83% lags the developed world, and within countries, 55% it is typically major cities and towns that are online. Most rural or remote communities, which SKILLS house four-fifths of the poor,15 are not online, or they 28% face higher prices or poorer quality services. Divisions 18% also exist across different demographic groups. Women, people with disabilities, social and ethnic ACCESS TO ELECTRICITY minorities, and older people typically lag behind 100% in access to and use of digital technology.16 Many 79% individuals and businesses will thus be unable to take advantage of technology to improve productivity and SOCIAL PROTECTION incomes, simply because they do not have access to 64% the hardware.17 22% But even if the technology is available, limited Doing Business RANKING skills imply that few developing countries, #43 and businesses and individuals within those #155 countries, will be in a position to use those technologies in a productive manner. Skill gaps exist at two levels. First, many developing countries ADVANCED ECONOMIES have limited pools of technically highly-skilled EMERGING ECONOMIES workers, limiting innovation, technology transfer, or simple adoption and maintenance. Second, many Notes: ICT adoption by individuals: Internet users (per 100 people); workers in the developing world do not have the Adoption of technology by businesses: Percent of firms having their own digital literacy—and in some cases, even more basic Web site (OECD vs ECA); Availability of skills: Labor force with tertiary education (% of total); Infrastructure: Access to electricity (% of population); cognitive and technical skills—to use technology Coverage of social protection programs: Percentage of unemployed receiving unemployment benefits (Western Europe vs Central and Eastern Europe); in their occupations (see Figure 2). For example, in Average Doing Business ranking: Average of rankings (all high-income vs all Africa, about 70 percent of people who do not use low-income countries); a lower number is better. the Internet say it is because they do not know how 14 See World Bank, World Development Report 2016, Overview. 15 “Taking on Inequality, 2016,” World Bank Poverty and Shared Prosperity Report. 16 World Bank, World Development Report 2016, Chapter 2. 17 OECD, Future of Productivity, 2015, available at: http://www.oecd.org/eco/OECD-2015-The-future-of-productivity-book.pdf; Marti, Ferrer; Diego, Comin. (2013) If Technology Has Arrived Everywhere, Why has Income Diverged? Available at: http://www.nber.org/papers/w19010 6 to use it.18 They miss the opportunity of increasing productivity, while increasing the risk that they may be substituted by technology in the future. Finally, other analog complements of digital development—rules and institutions—are often also weaker in developing countries. 19 Key socioeconomic development indicators reflect these divergences, including access to finance that allows workers to buy technology and firms to innovate, and core utilities such as electricity, and social protection strategies that would support displaced workers through transitions and prevent a deterioration in job quality. This does not mean that developing countries and groups within countries cannot benefit from technological change. Some have skipped over traditional methods and leapfrogged into adopting new technologies, taking advantage of their greenfields to deploy systems such as biometric identification for social programs (for example, India), or drones for medical deliveries rather than by road (for example, Rwanda). About a third of the robots bought by Chinese firms are now manufactured in China, and countries such as India and the Philippines are world leaders in business process outsourcing and IT services. Yet absent technology access, skills, and good analog complements, such advances might be limited to a few businesses or individuals in the larger cities, exacerbating inequality. TOWARD A MORE INCLUSIVE FUTURE OF WORK Public policies could position countries better to Africa have invested in public-private partnerships to mitigate the risks and take maximum advantage of extend Internet connectivity into rural areas. the opportunities. Key measures include: Building skills for the workforce of the future. Overcoming existing divides by addressing bottle- Educational systems need significant reforms to necks in technology access. Focus on addressing impart the basic, technical and socio-emotional skills regulatory and market failures that hold back the needed to allow the next generations to participate provision of affordable and reliable Internet access, fully in a global digital economy. In cases where access to electronic payment systems, and access wholesale reform is difficult, bridging from education to low-cost devices. Public interventions may be to employment could help close some skills gaps. In necessary to overcome the divides that limit the some contexts, additional outreach to communities participation of women, the poor, people with disabil- may be required to ensure that women and people ities, and rural communities in the digital economy. with disabilities—who can gain from online work or For example, a number of countries in South Asia and learning opportunities—are not excluded. The World 18 World Bank, World Development Report 2016, page 123. 19 See World Development Report 2016, Overview chapter. 7 Bank has funded such training programs, focusing on connecting young people to jobs by improving access to IT certifications (for example, Mexico) or via online work platforms (for example, Kosovo). Investing in enabling environments. Improving access to finance, to infrastructures such as electric power, logistics, and public services, will be critical to unlock the full range of benefits from digital devel- opment. Social safety nets would need to reform to protect gig workers and to support those who lose their jobs or need transition assistance. If the future is one of little work, cash transfers and universal basic income strategies—being piloted in the U.S. and Finland—may need to be developed.20 Technology can in turn help overcome the bottlenecks to access, build skills (long distance learning) and deliver the analog complements to leapfrog weak logistics, through digital financial services, renewable energy, mobile government services, and innovations such as drones. 20 http://www.economist.com/news/briefing/21699910-arguments-state-stipend-payable-all-citizens-are-being-heard-more-widely-sighing This Jobs Note was prepared by Siddhartha Raja and Luc Christiaensen. Siddhartha Raja (sraja2@worldbank.org) is a Senior ICT Policy Specialist (Global Practice on Transport and ICT, World Bank Group) and Luc Christiaensen is a Lead Agriculture Economist (Jobs Group, World Bank Group). The note draws on a background paper prepared by the authors for the Employment Working Group of the G20, February, 2017 in Hamburg, Germany. 8