How Does Industry 4.0 Affect Growth and Employment?

By Prof. Dr. Harald Hagemann

With the digitilization and global linking of production – the “fourth Industrial Revolution” – the specter of unemployment in the technology sector has entered central stage again. In its special report on June 25, 2016, on Artificial Intelligence, The Economist proclaimed “The return of the machinery question,” which first had been posed in serious economic literature by David Ricardo in 1821. Since then, a controversy between labor-displacement pessimism and compensation optimism has run through the economic literature as well as public policy debates. Although this controversy gained steam every time greater technological dynamism led to higher unemployment, Schumpeter pronounced this controversy “dead and buried.” However, the current debate, which led authors such as Brynjolfsson and McAfee to proclaim the “second machine age,” contradicts the author who stated that “creative destruction” is the essential fact of capitalism.

Schumpeter’s term of creative destruction indicates well the double-sided nature of technological change, which, on the one hand, destroys old jobs and firms and leads to an erosion of old qualifications and shrinking sectors, but, on the other hand, stimulates the creation of new jobs, firms, and the rise of new sectors. This raises three important questions for the economy as a whole:
1. Do the compensation effects balance, or even dominate, the displacement effects?
2. Do the new technologies require higher or lower skill levels than the old ones?
3. How do the new technologies influence the distribution of income – in particular,
do new labor-saving technologies contribute to higher levels of inequality regarding income and wealth distribution?

Since the future is uncertain and there are many other economic, political, and social factors beyond new technologies that will influence the development of employment, skills, and distribution, reliable empirical predictions are almost impossible to make. However, it is relatively easier to make predictions about the future prospects of existing jobs that are at risk than about new jobs being generated due to the diffusion of the new technologies. Thus, in the widely cited study “The Future of Employment. How Susceptible Are Jobs to Computerization?” by Frey and Osborne from Oxford University, the authors came to the result that 47 percent of existing jobs in the United States are in danger of being replaced by computer capital soon. A similar study for Germany found that 59 percent of the jobs are at risk due to the digital revolution.

Deeper analysis reveals that the probability of being replaced by computer capital varies widely between different groups of employees. Whereas academics in scientific and creative professions, such as doctors, chemists, and physicists, are hardly affected, office jobs and auxiliary workers in transport and logistics are extremely vulnerable to automation. Most studies found that the decisive issue is whether the job concerned pursues a routine activity, and not whether it is a blue-collar or white-collar job. Brynjolfsson and McAfee have pointed out that the second machine age is characterized by a bifurcation – or job polarization – between two groups of employees: unskilled, low-paid workers whose work is dictated by computers, and highly paid, skilled ones who are managing Industry 4.0.

Is this time different? Partly yes. Whereas past technological revolutions frequently created disadvantages for low-skilled workers whose jobs could be easily eliminated due to the diffusion process of new, more productive technologies, the digital revolution also affects medium-qualification levels. In their book The New Division of Labor. How Computers Are Creating the Next Job Market, Levy and Murnane have already predicted this lower demand for middle skills. This is because progress in the new information and communication technologies enables the automation of more complex tasks that are based on certain rules and routines, such as the handling of tax declarations.

In a study from January 2016 for the World Economic Forum in Davos entitled “The Future of Jobs. Employment, Skills and Workforce Strategy for the Fourth Industrial Revolution,” which was based on a poll survey of the leading managers of the 350 largest companies, a net loss of 5.1 million jobs is predicted for the leading economies in the period 2015–2020. This would be the result of a reduction of 7.1 million routine jobs, which would be countered by the creation of only 2.1 million jobs, mainly in the IT technology sector. As a consequence, an increase in human capital in fields such as mathematics, computer and natural sciences, and engineering is being demanded, including a higher share of women in these areas to avoid a structurally higher unemployment rate for women in the future. A study of the labor market research institute IAB in Nuremberg from August 2015 is much less pessimistic in its prediction of a net loss of 60,000 jobs by 2025 due to Industry 4.0 in Germany. An important point is the emphasis that not only academics but also higher-skilled workers will be among the winners of the digital revolution, if they acquire the additional skills necessary for the future linking of industrial production with computer technologies. This indicates the importance of research and education as a prohibitive labor market policy to avoid higher unemployment in the technology sector in the future.

One need not deplore every job loss due to technological change. A good example is the use of industrial robots to replace workers who once were employed lacquering cars and who suffered high rates of cancer due to breathing in poisonous steams. New technologies imply risks and chances. The restructuring of economies – from an older industrial economy to a modern one – strengthens the options for “green growth” strategies. The digital revolution not only makes greater material productivity possible or creates efficiency in the use of natural resources, but it also generates a general reduction in the absolute use of non-renewable resources. This may help in contributing toward the requirements of sustainable development – in the economic as well as the ecological and social dimensions. This also makes the greater synthesis of two hitherto widely independent developments necessary: the digital revolution and strategies for coordinated sustainable development policies, which first became an issue at the United Nations Conference on Environment and Development in Rio de Janeiro in 1992, and were further specified in the worldwide agenda of the Millennium Development Goals in 2000.