Experts see that the 3rd Industrial Revolution is upon us. How many jobs will be lost?

Larry Kummer, Editor

12 years ago

Summary: It’s been almost 4 years since the first article appeared on the FM website warning about the next wave of job losses from automation. Now experts slowly begin to grapple with this problem, estimating its magnitude, extent, and possible solutions. Here we look at three of these. Properly managed, the 3rd industrial revolution will be an unmixed blessing to all. But only if we manage it better than we’re doing with simpler problems today.

We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come – namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.

But this is only a temporary phase of maladjustment. All this means in the long run that mankind is solving its economic problem. I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day. There would be nothing surprising in this even in the light of our present knowledge. It would not be foolish to contemplate the possibility of afar greater progress still.

“Economic possibilities for our grandchildren” by John Maynard Keynes, The Nation, 11 October 1930. He had confidence in our ability to solve both economic and political problems of modernization.

Retail: an example of the coming wave of losses
Number crunching to estimate the jobs at risk
A more realistic analysis
For More Information

(1) Retail: an example of the coming wave of losses

The next industrial revolution will improve productivity in many ways, not just the simple machine-replace people exchange seen so often in the past.

Fifteen million people work in retail, plus millions more in jobs supporting them. A large fraction of those jobs will go away in the next decade as e-commerce gains market share. Salespeople, the people that run and maintain the companies and the stores, the people that maintain the buildings — a widening circles of impact.

Here’s one of the many articles appearing as the inevitable approaches: “The Tipping Point (E-Commerce Version)“, Jeff Jordan (Partner, Andreessen Horowitz), 14 January 2014 — Excerpt:

We’re in the midst of a profound structural shift from physical to digital retail. The drivers of this shift are simple:

Online retail has strong cost advantages over its offline counterparts and is rapidly taking share in many retail categories through better pricing, selection and, increasingly, service.

These offline players have high operational leverage and many cannot withstand declining top-line revenue growth for long.

The resulting bankruptcies of physical retailers remove competition for online players, further boosting their share gains.

So, how has this shift been playing out? Recent data suggests that it’s happening faster than I could have imagined.

The data suggests that there are two very different patterns going on with respect to e-commerce penetration. The two largest categories — “Food and Beverage” and “Health and Personal Care” — show e-commerce penetration well below the overall average. These categories essentially are the domains of grocery stores and drug stores, and e-commerce (at least to date) has achieved only modest penetration of these massive categories (but Amazon Fresh has designs on changing that).

… One additional observation is that the pace of online share gain in the specialty retail categories shows absolutely no signs of slowing down.

… Now let’s throw in one more massive complication for brick-and-mortar retailers in these categories: The total retail sales in these markets have been extremely sluggish, and have barely recovered back to pre-recession levels. This is a toxic combination — physical retailers in these categories are losing share of a total retail pie that isn’t growing. The inevitable result is that the portion of the pie left available for physical retailers is shrinking rapidly …

The result of these macro shifts is a Darwinian struggle playing out in the malls of America among physical retailers. … The stark reality for brick-and-mortar retailers is that there currently are just too many stores. Remember, these retailers have very high levels of operating leverage, and a meaningful decline in sales can quickly render them unprofitable and eventually unviable.

This is just one small aspect of the 3rd industrial revolution now upon us. It will make America (and the world) a better place, if the fruits are shared. Otherwise we will have a 1% of people like Jeff Bezos, a small middle class, with the mass of low wage workers (some combination of minimum wage, part-time, no benefits).

(2) How many jobs are at risk?

After long denying that there is a problem, some academics have begun to estimate its impact. One such: “The Future of Employment: How Susceptible are Jobs to Computerisation?“, Carl Benedikt Frey and Michael A. Osborne, 16 August 2013.

We examine how susceptible jobs are to computerisation. To assess this, we begin by implementing a novel methodology to estimate the probability of computerisation for 702 detailed occupations, using a Gaussian process classifier. Based on these estimates, we examine expected impacts of future computerisation on US labour market outcomes, with the primary objective of analysing the number of jobs at risk and the relationship between an occupation’s probability of computerisation, wages and educational attainment.

According to our estimates, about 45% of total US employment is at risk. We further provide evidence that wages and educational attainment exhibit a strong negative relationship with an occupation’s probability of computerisation.

See the table to the right for a sample of their estimates; see the full list on pages 57 to 72.

Their calculations assume that automation in the 21st century will differ from the waves during the 19th and 20th centuries, which largely affected skilled workers. No surprise, as neither “artificial intelligence” or “expert system” are mentioned (except to say there are as yet no machines of “human-level intelligence”) — a backwards-looking analysis inexplicably typical of people writing about automation. Their estimates are probably far too low.

(3) A more realistic analysis

“The onrushing wave“, The Economist, 18 January 2014 — “Previous technological innovation has always delivered more long-run employment, not less. But things can change.” Excerpt:

Nowadays, the majority of economists confidently wave such worries away. By raising productivity, they argue, any automation which economises on the use of labour will increase incomes. That will generate demand for new products and services, which will in turn create new jobs for displaced workers. To think otherwise has meant being tarred a Luddite—the name taken by 19th-century textile workers who smashed the machines taking their jobs.

For much of the 20th century, those arguing that technology brought ever more jobs and prosperity looked to have the better of the debate. … Industrialisation did not end up eliminating the need for human workers. On the contrary, it created employment opportunities sufficient to soak up the 20th century’s exploding population. Keynes’s vision of everyone in the 2030s being a lot richer is largely achieved. His belief they would work just 15 hours or so a week has not come to pass.

Yet some now fear that a new era of automation enabled by ever more powerful and capable computers could work out differently.

… Answering the question of whether such automation could lead to prolonged pain for workers means taking a close look at past experience, theory and technological trends. The picture suggested by this evidence is a complex one. It is also more worrying than many economists and politicians have been prepared to admit.

The lathe of heaven

Economists take the relationship between innovation and higher living standards for granted in part because they believe history justifies such a view. Industrialisation clearly led to enormous rises in incomes and living standards over the long run. Yet the road to riches was rockier than is often appreciated.

In 1500 an estimated 75% of the British labour force toiled in agriculture. By 1800 that figure had fallen to 35%. When the shift to manufacturing got under way during the 18th century it was overwhelmingly done at small scale, either within the home or in a small workshop; employment in a large factory was a rarity. By the end of the 19th century huge plants in massive industrial cities were the norm. The great shift was made possible by automation and steam engines.

… the lot of the average worker during the early part of this great industrial and social upheaval was not a happy one. As Mr Mokyr notes, “life did not improve all that much between 1750 and 1850.” …

Brave new world

Even after computers beat grandmasters at chess (once thought highly unlikely), nobody thought they could take on people at free-form games played in natural language. Then Watson, a pattern-recognising supercomputer developed by IBM, bested the best human competitors in America’s popular and syntactically tricksy general-knowledge quiz show “Jeopardy!” Versions of Watson are being marketed to firms across a range of industries to help with all sorts of pattern-recognition problems. Its acumen will grow, and its costs fall, as firms learn to harness its abilities.

The machines are not just cleverer, they also have access to far more data. The combination of big data and smart machines will take over some occupations wholesale; in others it will allow firms to do more with fewer workers. Text-mining programs will displace professional jobs in legal services. Biopsies will be analysed more efficiently by image-processing software than lab technicians. Accountants may follow travel agents and tellers into the unemployment line as tax software improves. Machines are already turning basic sports results and financial data into good-enough news stories.

The Economist staff concludes with the obligatory faith-based confident guesses that new good jobs will appear to replace those lost. After all, good new jobs appeared during the first two industrial revolutions. How could the advent of semi-intelligent or even narrowly intelligent machines change history?

“In the long run we are all dead. Economists set themselves too easy, too useless a task if, in tempestous seasons, they can only tell us that when the storm is long past the ocean is flat again.”

— John Maynard Keynes in A Tract on Monetary Reform (1923)