Reflections on Innovation, Productivity and Job Creation

A couple of weeks ago I attended a workshop on Information Technology and Economics sponsored by the National Bureau of Economic Research (NBER).  The two-day workshop consisted mostly of presentations and discussions by renowned economists of their latest work.  I was invited to participate in the workshop as part of an industry panel on “IT and Economics on the Internet”.

I have become quite interested in economic issues in my post-retirement life of the past few years, as I have had more time to think about and learn new disciplines.  This interest is a natural outgrowth of my work on highly complex systems, especially the kinds of people-oriented complex systems with which economists generally deal.

So, I was very happy to be surrounded by economists for two days, and in particular to have a chance to talk with experts in the field about some of the problems I have been thinking about, especially during the nice dinner we had in the evening of the first day of the workshop.

For example, over the past year I have given a number of seminars on Technology and Innovation in the Service Economy.  I am getting ready to teach a graduate course on the subject at MIT this Fall, where we will explore technology’s impact on industries ranging from finance to healthcare.  I have also been thinking a lot about the impact of these innovations on the productivity of the service sector of the economy in general, and in particular, on the kinds of jobs that we can expect to be created over the next decades to replace those jobs that might decline or disappear as a result of such productivity improvements.

The service sector is by far the largest in the US and other advanced economies.  In 2009, almost 80% of jobs in the US were in the service sector; around 20% in the industrial sector; and less than 1% in the agriculture sector.  One hundred years ago the labor composition was very different.  At the beginning of the 20th century, only 30% of the US labor force was in the service sector, 30% in the industrial and 40% in the agriculture sector.  Such a dramatic shift in jobs is largely due to the massive productivity improvements in the agriculture and industrial sectors as a result of the technological advances and innovations of the Industrial Revolution.

Although there are numerous technological innovations that have improved the productivity of services over the past century (e.g., telephone exchanges and ATMs), such improvements have been far smaller than those in agriculture and manufacturing.  But this is now beginning to change, thanks to huge advances in digital technologies, including mobile devices and sensors, information and analytics, cloud computing and broadband wireless networks.

Over the next decades, we can expect dramatic productivity improvements in services of all sorts as well as in the use of information and services throughout the economy.  If over time our productivity improvements in services are anywhere near those achieved in the agricultural and industrial sectors in the last century, we should expect that fewer people will be required to do many of today’s service jobs.  What kinds of new jobs can we expect to create in the future to replace the ones lost to these expected productivity improvements?

This is a critical question for the long-term economic well-being of the country.  But job creation is clearly a major issue in the short-term, as well, given our high unemployment rate.  As we know, a major reason for unemployment is the lack of growth in the economy as a result of our recent financial crisis and accompanying Great Recession.  But the current jobless recovery is at least partly due to our growing IT-based productivity, which is enabling companies to do their present work with fewer people, and postpone hiring new workers until they have more confidence in the future of the economy.

While it is very hard to predict what new jobs will be created in the future, we can look for guidance at the evolution of jobs as the Industrial Revolution unfolded.  Over the past two hundred years, every major technology revolution, such as the emergence of electricity and the automobile, led to a period of creative destruction, in which older jobs were eliminated or reduced by the advent of the new technology, industries got restructured and many companies disappeared because they were not able to make the necessary transition to the new way of doing things. 

However, after periods of restructuring, many new jobs, new companies and whole new industries were created.  Many of them were developing the new technologies, such as the equipment to produce and distribute electricity.  But many more companies were created to deploy the new technologies in all kinds of new ways, such as the invention of many new electric tools and machinery that revolutionized manufacturing, and the development of all kinds of new electric appliances.

None of us can tell whether this pattern will repeat itself in our present, IT-based revolution, or whether the economy will translate its increased productivity into new companies and new jobs, once confidence returns.  But no one doubts that the rate and pace of innovation will accelerate, with lots of new IT-based services and applications leveraging all those mobile devices and sensors, information analysis capabilities, clouds and wireless networks.  Economists have even been talking about a new, knowledge-based sector of the economy, distinct from the classic service sector, which will include many of these new information intensive jobs.  We just cannot tell how many new jobs will be created and when such a job-creating recovery will arrive.

Another potential source of new jobs, albeit lower paying ones, will hopefully follow from the rising standard of living made possible by the growth in productivity.  Past technology revolutions led to significant improvements in the standard of living by almost any measure - GDP per capita, Human Development Index or life expectancy.  It has been estimated, for example, that between 1820 and 1998 the overall GPD per capita in the US improved more than 20-fold. 

As the standard of living goes up, people have more money to spend on leisure activities, like entertainment, tourism and eating out, which lead to many new jobs, some high-paying, others less so.  Moreover, the increasing number of women in the workforce means that many jobs they previously did at home will now be outsourced to others, creating yet another source of jobs in the economy.  In addition, our increasingly aging population will need many more support services of all sorts.

It is also quite possible that many new kinds of jobs will emerge around social networks and collaborative communities that already involve millions of people around the world.  These social networks are giving rise to new, hybrid forms of collaborative work, where some of the people are paid and others are volunteering their creativity and time because of their personal interests in areas like healthcare, education and sustainability.  The ability to turn all this volunteer energy and innovation into productivity growth in society and new kinds of jobs is very intriguing.  The success of open source offerings like Linux is testament to the economic potential of collaborative production.

The nexus of new technologies, skills, innovation and jobs will have a fundamental impact on our economy and labor markets.  It is very important that we better understand the dynamics of this emerging digital economy.  Such understanding will hopefully lead to new kinds of innovative programs that governments and the private sector can implement to facilitate job creation.  At the very least, this will keep economists busy for a long time to come.

Comments

[Yuriko Sawatani]

I recently read a book about evolutionary economic theory, which was quite interesting. If the world is evolving continuously, then new jobs will be created, and selected in a society. So these changes would be natural movement, which we do not need to worry about too much.

I am also thinking about the change from service/information oriented society to experience/justice oriented one. Even the job gives a lot of money, but people will select one which they think that is interesting, good to spend a time on. New jobs are created based on our selection. : )

[Anna Smith]

I recently watched the movie 'Food, Inc.' and started thinking about the huge shift in agriculture from men to machines. I want to believe that the milk I drink still comes from cows 'who' live on a pasture and eat grass, but things have changed. Anyway, I enjoyed reading this very informative outlook. It'll be very interesting to learn where this IT-based revolution and the jobs that will hopefully come with it is headed.

[Kim]

Thanks for highlighting the fast pace of change since the industrial revolution. There is no doubt the digital age will make a lot of jobs obsolete as new jobs get created. This means that we are training undergraduates today for positions that may not exist any more when they join the workforce. This translates possibly into a different education system for our undergraduates as the new generation has to be a lot more nimble and malleable. Eventually, it is this flexibility to cope with change that will determine if they thrive or not in the new age.