How will Digitalization Affect the Labour Market?

How will digital technologies impact the labour market? Below are six propositions that seek to shed light on this important question. The challenge facing policy-makers – in British Columbia, Canada and globally – is how to maximise the productivity gains of technological progress through digitalization, while taking steps to mitigate its intrinsically-skewed distribution of benefits.

1. Technological capabilities have expanded. The range of human tasks that can technically be performed by computer-based technologies is expanding. Many routine or rules-based tasks and social interactions can now be automated. Tasks that remain hard to automate tend to involve cognitive skills such as creative or social intelligence, or the perception and dexterity to deal with unstructured, awkward and irregular manual tasks.
2. Technologies are productivity-enhancing though they do not appear to be direct net job creators. Industries that are technology-intensive have made strong contributions to productivity growth. However, most employment growth has taken place in less technology-intensive industries (e.g. health, education, retail services). Across advanced countries, the ICT-producing sector itself is a small employer and has made minor contributions to total employment growth over time.
3. Technology prices have fallen or been flat over recent decades. Lower capital input price growth relative to wage growth (along with ever-improving technological capabilities) encourages firms to substitute capital for labour. Employment growth and wage growth tend to be muted in skill-sets and occupations that compete with labour-substituting technologies.
4. Recent technologies are skill-biased and contribute to wage inequality. There are strong complementarities between human capital and technology. New technology-intensive occupations require high skill. New technologies create employment and (when the pace of technological change outruns the growth in high-skill labour supply) raise wages for high-skill workers. Skills‑biased technological change is a principal driver of wage inequality.
5. Recent technologies are routine-biased and contribute to job polarization. Technological change is a chief contributor to labour market polarization in advanced economies – the “hollowing out” of jobs in the middle portion of the skill distribution. Mid-skill occupations that compete with technology have seen little employment growth or real wage growth in recent decades. Meanwhile, rising employment and incomes among high-skill occupations have boosted the overall demand for services. This has contributed to strong job growth in low-skill, service-based occupations, but not necessarily much real wage growth as low-skill workers compete with labour-substituting technologies and displaced mid-skill workers.
6. Technological change is contributing to a decreased share of national income received by wage earners. There has been a multi-decade decline in the share of national income earned by labour (known as the “wage share” or “labour share”) relative to the share earned by owners of capital (“profit share”). Technological change is a chief contributor as increasing technological capabilities and declining or flat technology prices incentivize capital deepening and labour-substitution, especially in mid-skill occupations. The shrinking income share for wage earners is a widespread phenomenon. It can be seen across countries (including industrializing economies like India and China), across and within industries, and occurs notwithstanding differences in countries’ industrial structures, collective bargaining arrangements or union densities.

For further reading, see our Human Capital Law and Policy publication for June 2018.