Why govts need to support workers during their transition to automation

We are living in an age of insecurity, with the values of the global liberal order under fire despite the progress they’ve delivered for the vast majority of people. The rise of populism in politics, fears over slowing economic progress in advanced economies, and worsening prospects for future generations, as well as mounting evidence of declining subjective well-being and trust in many countries, are all expressions of this. Those who don’t feel they’ve benefited from the current order are understandably agitating to change it.

This backlash against “globalisation” reflects a failure of our social contract — the mechanisms through which we share risks and offset, to some extent, the impact of luck on life chances. This is embodied in our welfare states, which define the rights and obligations of citizenship; the payment of taxes in exchange for public goods; and the way in which we look after the young, the old, the infirm and those who have fallen on hard times. While globalisation increased the total pie, our social contract has done a poor job of sharing the benefits. We need to rethink that contract if we are to provide people with a greater sense of security and better economic prospects.

Central to this task are measures to ensure our economies are fairer. While globalisation has meant the world has become more equal between nations — with many poor countries having seen huge progress in recent decades — it’s also exacerbated inequalities within advanced economies particularly.

To combat this over the medium term, “pre-distribution” policies such as investments in education and infrastructure will be key. In the short run, however, redistribution also needs to play a part, especially as labour markets reward the highly skilled more and more. Tax reforms in advanced economies over the last 20 years have become less progressive; this needs to be reversed. Wealth inequality has grown even more than income inequality, so taxes on wealth such as land and real estate should be considered.

We also need to counter the large increase in the share of total income that’s gone to capital relative to labour. Capital is highly mobile and can evade taxation through the use of havens and various “tax-efficient” arrangements. International agreement on ways to close such loopholes and tax economic activity where it takes place would go a long way toward making the world economy fairer.

That needs to be complemented by giving citizens more time to adjust to the competitive pressures and technological changes that globalisation brings. Mechanisms are needed to give workers more bargaining power — including stronger trade unions, and the use of profit-sharing schemes or cooperatives.

There also needs to be a floor on incomes to ensure everyone can enjoy a reasonable standard of living even if their wages are low. Rather than the much discussed universal basic income, better solutions could include wage subsidies, earned-income tax credits or higher minimum wages, combined with better access to services such as education, health and other public goods. 

We also need to reassure citizens about their economic futures even as the societies around them age and their workplaces are automated. Demographic changes mean that many of us who are fit enough will have to work longer. Linking retirement ages explicitly to life expectancy (as the Netherlands has done) would help tailor expectations to this new reality.

Re-skilling over one’s lifetime will also become ever more important, and governments will have to invest substantial resources in the task, as Denmark does, since employers will have weak incentives to do so when employee turnover is rising. In fact, workers should be given a financial entitlement to invest in their own skills so they can retool and be able to continue to support themselves.

Automation will transform labour markets regardless. While eventually new jobs will emerge, workers need to be supported during this transition. We should use gains in productivity as an opportunity to eliminate aspects of jobs that are routine and repetitive and replace them with more meaningful work and leisure. As countries get richer, people work fewer hours. Giving part-time and temporary workers (who tend to be lower-skilled and lower-paid) more rights to pensions, paid leave and training has worked out well for countries such as Denmark, Germany and the Netherlands.

Some new social contract along these lines is essential to sustain political support for open economies and societies. These issues are deeply rooted in history and values, so every country will make different choices on the balance of responsibilities between the individual, the state and the market.

@2018Bloomberg