The Pain of the Fourth Industrial Revolution

A recent publication by the World Economic Forum (WEF) looks at the "Fourth Industrial Revolution" and how it will impact the global job market.  The ideas presented in this paper are particularly critical given that one part of the Federal Reserve's dual mandate is to ensure maximum employment, an issue that will become increasingly difficult during the next recession if the WEF's projections are correct.  

As technology advances, the work tasks performed by humans is rapidly shifting; if managed well, these technological advances could lead to a new period of good jobs, higher productivity and a higher quality of living but, if managed poorly, could lead to greater income inequality, a wider gap in job skills and higher unemployment.  Over the time horizon covered by the WEF report (2018 to 2022), the authors of the report indicate that many existing jobs will be augmented with technology, particularly in data processing, information searching and jobs that require reasoning and decision-making.  

The authors of the report focussed on the results from a broad survey of academia, international organization, professional service firms and the heads of Human Resources departments at major organizations.  The questions focussed on three aspects:

1.) mapping the workplace transformations already underway

2.) documenting shifting work tasks and the resulting changes in skills requirements that are anticipated for a workplace in 2022.

3.) understanding priorities that companies have set to reskill and retrain employees.

Here is a cross section of employees represented by the companies in the survey:

Obviously, a massive change in workplace automation technology will require a substantial investment; one estimate suggests that up to $8 trillion will be required over the next ten to twenty years.  The WEF survey found that, depending on the specific technology, up to 85 percent of respondents planned to expand their adoption of higher technology by 2022 as shown here:

Interestingly, 23 percent of companies expect that they will adopt relatively uncommon technologies like humanoid robots by 2022.

The increasing adoption of technology will have a significant impact on the jobs landscape by 2022.  Across all industries, the currently emerging professions will increase its share of total employment from 16 percent to 27 percent whereas the employment share of declining roles is set to decrease from 31 percent to 21 percent, meaning that, in quantitative terms, the structural decline in certain job types will be balanced by the structural increase in new professions.  While that is somewhat reassuring, you can be certain that the workers in the declining jobs will likely not have the skills required to fill the jobs in the emerging professions. 

Here is a table showing the jobs that are likely to remain stable, are new or are redundant in all industries of the job marketplace of 2022:

From the list, it is quite apparent that the redundant jobs are often in the service sector or in jobs that require less formal education meaning that it is highly unlikely that the same employee that finds themselves redundant will be able to take on the job duties of a new technologically driven job (i.e. a door-to-door salesperson is highly unlikely to be a robotics engineer or a petroleum engineer) since the training required is very, very specific to that job. 

Here is a table showing how the demand for certain job skills is expected to change over the next five years:

Here is a quote about this the job skills issue from the paper:

"Proficiency in new technologies is only one part of the 2022 skills equation, however, as ‘human’ skills such as creativity, originality and initiative, critical thinking, persuasion, and negotiation will likewise retain or increase their value, as will attention to detail, resilience, flexibility and complex problem-solving. Emotional intelligence, leadership and social influence as well as service orientation also see an outsized increase in demand relative to their current prominence."

In today's job market, nearly two-thirds of jobs entail at least 30 percent of tasks that could be automated with current technology.  Out to the mid-2030's, it is projected that fully automatable maul tasks will rise from less than 5 percent today to nearly 40 percent and the share of automatable tasks involving social skills will rise from less than 5 percent today to about 15 percent over the same timeframe.

Let's close with this graphic which shows how the ratio of human-machine working hours is projected to change over the period between 2018 and 2022:

On average, employers expect that machines and algorithms will increase their contribution to specific tasks by 57 percent over the next five years.  On the upside, what really excites employers is the estimate that labour-augmenting automation technology could lead to average labour productivity increase of 30 percent compared to 2015 across all sectors of the economy.  More for less!

As we can see from this fascinating analysis, we are on the cusp of major changes to the global job market, thanks to technology.   With only 33 percent of companies stating that they would prioritize the retraining of employees who were seen to be at high risk of losing their jobs to technology compared to 54 percent of companies stating that they intend to target training for employees that are already in key roles, it is quite clear that the Fourth Industrial Revolution is going to be an extremely painful transition for millions of workers.  Additionally, it is also going to make the task of the world's central banks far more difficult the next time that their imaginative services are required to lift the global economy out of a recession/depression.

America's Great Worker Displacement

Updated July 2017

While the American and Canadian employment pictures have improved since the end of the Great Recession, there is something different about this recovery that has not been experienced in previous economic expansions.  While several factors are at play, there is one significant factor that is preventing the creation of new jobs at the pace experienced in the past, particularly in the manufacturing sector as you will see in this posting.

Over the past forty years, the workplace has changed for the corporate world and it appears that we are on the cusp of even greater changes; the replacement of human labor with workplace robotics.  While many workplace tasks are still performed by hand, this will change over the coming decade as mechanical labor becomes cheaper than human labor.  According to the Boston Consulting Group (BGC), the world is nearing the inflection point where an attractive return on investment is possible when switching from manual labor to robots on a large scale.  Today, nearly three-quarters of all robots operate in four industries; appliances, electrical equipment and components, computers and electronic products, transportation equipment and machinery.  Additionally, 80 percent of the robots sold every year are sold to just five nations; the United States, South Korea, Japan, Germany and China although, admittedly, these are the world's largest economies.  Since robots are currently quite expensive, they tend to be found in only the world's largest factories as you can see in this video showing the Tesla factory which looks like something out of the Terminator movie franchise:

Here is a graph showing how global robotic installations are projected to increase over the period out to 2025:

According to BGC, annual shipments of robots will jump from 200,000 in 2014 to more than 500,000 by 2025; while this is a huge increase, it still accounts for only 25 percent of global manufacturing tasks and less than that amount in other industries showing how much potential capacity there will be for additional adoption of robotics on a going forward basis.

There are three things holding back wider adoption of robots:

1.) cost effectiveness of robots vs. human labor.

2.) technological barriers to adoption of robots in some sectors of the economy.

3.) lack of robotic systems that are affordable and applicable to smaller manufacturers.

Once these three barriers are overcome, the adoption of robots will grow very rapidly.  According to the authors of the report, companies start to adopt robotic automation when the cost of employing human labor becomes 15 percent higher than the cost of owing and operating robots.  That hurdle point is rapidly approaching.

Let's look at a sample industrial application of robotics.  Here is a graphic showing the dropping cost of an advanced spot-welding robot in used in the U.S. auto manufacturing industry:

The cost of a spot-welding robot has dropped from an average of $182,000 in 2005 to $133,000 in 2014 and is expected to drop to around $102,000 by 2025.  The price of robotics hardware and software is 40 percent lower than it was a decade ago and the cost of other associated equipment including safety structures, sensors and display also continue to drop.  In total, an investment in a spot-welding robotics system in 2015 bought a system that is capable of performing two times as much work as a system costing the same amount in 2005.  Today, a human welder earns around $25 per hour while the per hour operating cost of a robot welder is around $8 per hour including installation, maintenance, operating costs of all hardware, software and peripheral devices.  The authors project that this cost could drop to as little as $2 per hour over the next fifteen years.  This does not bode well for at least part of the welding sector of the economy.

Obviously, some workplace tasks are currently too complex for robots.  That said, improving technology has resulted in the creation of robots that operate very accurately at very high speeds, a necessity for the electronics manufacturing sector.  As well, the adoption of 3D visual inspection systems enables robots to perform complex cutting and trimming jobs in the meat processing sector.  Another advantage to robots is that they are being designed so that they can be reprogrammed to perform new jobs without the high capital cost of investing in a new robotic system.  Here's an example from the paper:

"Wiring accessory manufacturer ABB Elektro-Praga, for example, needed to increase throughput at its factory in the Czech Republic. The company wanted machines that could pick parts from a bin and orient them properly for assembly, a task that conventional robots could not perform at high speed and with precision. It also wanted robots that could work on different product configurations with minimal adjustment. ABB Elektro-Praga installed several of ABB’s IRB 140 robots on a new assembly line linked to a vision system equipped with digital cameras. The vision system enables the robots to orient parts and place them at a cycle time of 2.3 seconds per electrical socket, for example. It takes only 10 minutes to adjust the system to pick and place parts for different products, which are often changed up to 30 times each week. As a result of the new system, ABB Elektro-Praga says that it has boosted throughput of each shift by a factor of about nine. Only one worker is required to oversee the entire robotics assembly line." (my bold)

While all of these developments are fascinating, they are less than advantageous for workers in the United States, Canada and other nations.  As more companies adopt robotics, the demand for human labor will decrease or level out, resulting in the "Great Displacement" of American and Canadian workers and their peers in other nations.  It will also likely result in dropping (or flattened) compensation for remaining workers.  After all, robots don't call in sick, they don't require costly pensions and health benefits, they don't join unions and they don't go on strike.  That has to be appealing to the corporate world's corner office dwellers who spend their days concerned about their bottom lines.

Losing Jobs to Computerization

While Donald Trump quite regularly refers to either bringing jobs back to America or keeping jobs in America, a paper by Carl Frey and Michael Osborne shows that outsourcing jobs to foreign shores may not be the only mechanism that is keeping Americans unemployment at elevated levels, particularly in manufacturing and the service sector.

In their paper entitled "The Future of Employment: How Susceptible are Jobs to Computerization?", the authors looked at the probability of computerization for 702 "detailed occupations" with the ultimate goal of looking at the number of jobs at risk in the future and the relationship between an occupation's probability of computerization, wages and educational level.  Using recent advances in machine learning (ML) and mobile robotics (MR), the authors develop a method by which they can categorize the aforementioned 702 occupations by their susceptibility to computerization.  

The "Computer Revolution" began in the 1960s with the first commercial use of the massive, room-filling computing machines of the time.  The first industrial robot was introduced in the 1960s by General Motors and during the 1980s and 1990s, computing costs declined by an average of 64 percent annually at the same time as computing power surged.  Bar code scanners and ATMs became ubiquitous, eliminating some jobs in retail and the banking sector and with the introduction of the first personal computers in the early 1908s, jobs in the clerical world both changed and were eliminated.  The adoption of computerization had a significant impact on wages with a 1993 study showing that workers using a computer earning 10 to 15 percent more than other occupations, a situation that sent many Americans (and others) back to school for further education.  This has resulted in a polarized labour market with growth in low-income manual occupations that have been resistant to computerization and high-income cognitive jobs and a decline in the number of Americans (and others) employed in middle-income routine jobs.  As well, high-skilled workers have moved down the occupational ladder and have taken jobs that were traditionally performed by low-skilled workers, pushing at least some of those low-skilled workers right out of the labour force.

The authors focus on two types of computerization; 

1.) machine learning (ML) which includes data mining, machine vision, computational statistics and other fields related to the development of artificial intelligence.  Advances in these fields have brought us things like Apple's Siri which can recognize spoken word and speech recognition/voice response systems which are used in automated call centres.

2.) mobile robotics (MR) which leverages ML technologies so that robotic technology can perform the routine tasks involved in manufacturing.  One prime example is the development of driverless vehicles by Google and the development of robots that can climb and maintain wind turbine towers by General Electric.

Over the past decades, robot prices have fallen by about ten percent annually, putting them in the hands of more users.  On a global basis, according to the International Federation of Robots, industrial robot sales grew by 15 percent on a year-over-year basis in 2015, hitting a record of 253,748 units with China having a 27 percent share of the total supply in 2015.  The biggest growth was in the electronics industry with a 41 percent increase, the metal industry with a 39 percent increase and the plastics and rubber industry with a 16 percent increase.

Now, let's look at the impact of computerization on employment.  Obviously, there are some occupations that will be more difficult to computerize than others due to certain bottlenecks as shown here:

Here is a graphic showing the probability of computerization (low, medium and high) for the Bureau of Labor Statistics occupational groupings:

Note that the jobs of 47 percent of workers in the United States have a high probability of  computerization and only 33 percent have a low probability of computerization.  In general, science and engineering occupations have a low susceptibility to computerization because they require a high degree of creative intelligence.  Occupations including health care, education, management, business and finance, arts and media are also less likely to be computerized because they require a thorough understanding of social intelligence that cannot (at least at this point in time) be duplicated with a robot.  The authors suggest that the high probability service,sales, office and administrative support occupations (among others) are likely to find human capital substituted by computer capital relatively soon.  As the advantages of human dexterity and mobility diminish as robot evolution progresses, the pace of human - computer labour substitution will grow.  Even jobs like personal and household services are increasingly using robots with the market forecast to grow by 23.5 percent annually between 2015 and 2020.

Here are two tables showing the probability of computerization for various wage and educational levels:

As you can see, the probability of computerization rises as median wage drops and as educational attainment drops.   

If you are interested in a detailed listing of the probability of computerization for each of the 702 occupations, you can find the listing at the end of the article.  Here are two screen captures showing the least susceptible and the most susceptible occupations for your information:

1.) Least susceptible:

2.) Most susceptible:

From this study, we can see that automation/robotics/technology bears and will continue to bear at least some responsibility for the persistence in high real unemployment rates (i.e. not the U-3 rate that is touted by the Bureau of Labor Statistics as its measure of employment health).  Unless America's employers are willing to shun the latest in both machine learning and mobile robotics, employment growth in the United States labour force will continue to be constrained even if overseas jobs are repatriated and Donald Trump successfully keeps some jobs in America.