Economic Updates

“Any competent economist will tell you that technology has had a much greater impact on jobs and wages than trade has had.” Ambassador Michael Froman told the Washington International Trade Association on January 10, 2017, “Some estimate that more than 80 percent of job loss comes from technology alone.”  

Technological progress has been a topic that goes back to the 1930’s, when the economist John Maynard Keynes famously said “We are being afflicted with a new disease of which some

readers may not have heard the name, but of which they will hear a great deal in the years to come – namely, technological unemployment.”

Little did he know that today’s pace of technological change would accelerate as rapidly as it has and involve some many moving parts, such as automation, robotics, artificial intelligence, machine learning and blockchain.

Throughout the years the economy and human beings have adapted to and benefited well from these disruptions. A individuals standard of living has been positively influenced in many ways and a greater number of new, never envisioned, technology related jobs were created, than lost.

Research shows that since the 1980s almost 22 million new non routine jobs have been created, providing workers new opportunities to think smarter, faster and more creatively.

Yet, the big question that remains is the scope of the impact today’s technological progress will have on the global workforce, especially in light of its more rapid pace. There is a legitimate fear that for the first time in history more jobs will be lost due to technology than created. And for the jobs that will be transformed or newly created, there will not be enough skilled workers to fill those jobs, and the wage divide between the highly skilled worker and those without the right skill sets will continue to grow.

For now most researchers are watching the speed of the transition. There is still a lot of uncertainty on how fast the more complex technological advances – automation and AI – are going to take place, and how fast companies will adopt them. So far, they see absolutely no evidence that companies are adopting the new technologies any faster than they ever have over the last 50 years or 60 years.

The Research

In a benchmark study in 2017 the McKinsey Global Institute estimated that 50 million American jobs (about 1/3 of United States’ workforce) will be automated by 2030; and on a global scale, between 400 million and 800 million jobs will be automated.

The silver lining of the McKinsey report – even though 50 percent of current work activities are technically automatable (by adapting currently demonstrated technologies) and six of 10 current occupations have more than 30 percent of activities that are technically automatable, very few occupations – less than 5 percent – consist of activities that can be fully automated.

Another report in 2017, by the Organization for Economic Cooperation and Development (OECD), the research and policy grouping of the world’s richest nations, was more sanguine about technology’s impact, stating that 10 percent of U.S. jobs are at high risk of vanishing due to automation, about 38 percent of jobs will be at risk  and about 28 percent will be transformed into new positions requiring a new set of skills.

The silver lining of the McKinsey report – even though 50 percent of current work activities are technically automatable (by adapting currently demonstrated technologies) and six of 10 current occupations have more than 30 percent of activities that are technically automatable, very few occupations – less than 5 percent – consist of activities that can be fully automated.

In a paper released in 2017, Daron Acemoglu of MIT and Pascual Restrepo of Boston University presented their own theoretical models of innovation, proposing that technological progress should be divided into two categories: the sort that replaces labor with machines; and that which creates new, more complex tasks for humans.

As to the first category, there are relatively few robots in the U.S. economy and the number of jobs lost due to robots has been limited, ranging between 360,000 and 670,000 jobs. However, in 2015 the BCG offered two scenarios for the spread of robots over the next decade. In their aggressive scenario, the world stock of robots will quadruple by 2025 and their more conservative scenario involves a less than threefold increase in the stock of robots. These changes would drive down employment and wage rates by more than one percent.  

The Economy

With history as its guide, McKinsey’s research shows that technology has created large employment and sector shifts, but also new jobs. They looked at the years 1850 to 2015 and found the following (I pulled the data for those categories that reflect L.A.’s leading sectors.): Trade (12.8 percent), Education (9.9 percent), Healthcare (9.3 percent), Finance (5.9 percent), Government (4.9 percent), Professional Services (5 percent) and Entertainment (2.2 percent). (One of the core reasons: companies don’t use automation simply to produce the same thing more cheaply. Instead, they find ways to offer entirely new, improved products. As customers flock to these new offerings, companies have to hire more people.)

The potential impact of automation on employment varies by occupation and sector. Research from Henry Siu at the University of British Columbia and Nir Jaimovich from Duke University shows just how much the world of routine work has collapsed. The economists released a paper, published by the centrist Democratic think tank Third Way, showing that over the course of the last two recessions and recoveries, a period beginning in 2001, the economy’s job growth has come entirely from non routine work. In other words the 21st century economy will not create the sorts of jobs we used to have.

For example, the industries that drive L.A.’s economy and are at the forefront of technological change – manufacturing, aviation, finance, medicine, transportation and construction, to name a few, will need a large number of highly skilled people to design, program, test, install and service the robots and the manufacturing systems being incorporated today. The good news is that preliminary research shows that human involvement will be required for many decades to come as safety, comfort, and technical limitations continue to require AV operators, safety/security officers, and technicians on board or nearby, thereby enhancing human productivity, rather than displacing it.

Other occupations that are currently low wage, such as nursing assistants and teaching assistants, will also increase, while a wide range of middle-income occupations will have the largest employment declines, such any kind of work involving a lot of data collection and processing, which machines can do very well, such as a mortgage officer assessing somebody’s credit risk.

Healthcare stands out the most in my mind as a sector abundant with job opportunities and skills development partnerships. Population projections from the California Department of Finance indicate that the L.A. County population will grow older in the coming decades. The trend is for the greatest growth to occur in the oldest age groups. Whereas the 2010 population age 50 or older is expected to increase 27 percent by 2020, the size of the population age 65 and older will grow by 43 percent.

The population aged 50 to 64 is expected to increase 16 percent by 2020 and the 65- to 79-year-old population will grow by 52 percent. Considering just the oldest-old adults, the age group 80 years or older will grow nearly 50 percent from 2020 to 2030.

As people age, their spending patterns shift, with a pronounced increase in spending on healthcare and other personal services. This will create significant new demand for a range of occupations, including doctors, nurses, and health technicians but also home-health aides, personal-care aides, and nursing assistants.

We have seen similar business models emerge in health insurance, where the data gathered by fitness trackers allows consumers to get a discount on their health insurance.Some software and telehealth will help relieve the strain on healthcare and home care workers, and automation will be limited by the highly unpredictable patient-facing tasks involved. Also, virtual assistants like Amazon’s Alexa are being used to answer basic questions on medication and symptoms,  AI-based virtual assistants serve as middlemen between nurses and patients, some startups are developing virtual assistants that integrate with medical devices. Although most telepresence robotics startups are still in their nascent stages, California- based InTouch Health raised $15M in a Series F round last year.

Professional services will see transformation. Collecting and processing data are two other categories of activities that increasingly can be done better and faster with machines. This could displace large amounts of labor—for instance, in mortgage origination, paralegal work, accounting, and back-office transaction processing. An example of change. The Pacific Investment Management Co., one of the world’s largest bond managers is betting a big part of its future on millions of lines of software code. The Newport Beach, Calif.-based firm plans to grow its workforce by 10 percent this year, adding about 250 new staff, mostly engineers who will be tasked with modernizing Pimco’s technology systems, from the tools used to harness new databases of information to the platforms that trade bonds electronically.

Overall spending on technology could increase by more than 50 percent between 2015 and 2030. About half would be on information-technology services. And Automation will have a lesser effect on jobs that involve managing people, applying expertise, and social interactions, where machines are unable to match human performance for now.

Retail is easily the largest U.S. industry now facing digital disruption and yet there is strong evidence e-commerce hasn’t reduced overall employment and has likely added to it. It is true that thousands of stores have closed. Between the end of 2007 and the middle of 2017, brick-and-mortar​ retailers ​lost the equivalent of​ 140,000​full-time jobs, according to a forthcoming report ​by Michael Mandel, chief economic strategist at the Progressive Policy Institute, a think tank. Electronic shopping jobs rose by only 126,000 in the same period.

But, Mr. Mandel notes, that excludes many jobs at fulfillment centers such as Fall River, which the federal Bureau of Labor Statistics​tends to count in warehousing and storage. He notes that Kentucky had just 3,213 e-commerce workers in 2016 according to the BLS, yet Amazon employs more than 12,000 there. Warehousing ​has added 274,000 ​jobs ​nationwide since 2007. Mr. Mandel argues all of ​those are attributable to​fulfillment centers and that thus total e-commerce employment has grown 401,000, nearly three times ​the ​brick-and-mortar drop. Mr. Mandel finds that fulfillment centers pay on average 31% better than brick and mortar stores in the same county.

Retail stores have started testing sales robots for inventory management and customer interactions; technologies like AI-based in-store advertising and self- checkout lines automate some aspects of a salesperson’s job and startups are raising funds to build robots that answer customer queries in stores and manage inventory. Yet, technology is still in its early stages of deployment, with no concrete measure yet of improved customer experience or cost-effectiveness for retailers. And a much more immediate risk of job loss is due to the shift towards online shopping, rather than the impact from automation. Startups are developing AI-based chatbots, product-recommendation algorithms, and targeted marketing analytics solutions for e-commerce. This leaves less room for job transfer from retail to e-commerce sales.

In recent interviews, Thomas Wolf, the Group CEO & Chairman of RIB Software AG, has stated that Construction & Real Estate are two industries have been left largely untouched by digital technologies. The slow movement on technology adoption is at least in part due to the fragmented nature of these industries. A large number of small players are undertaking made-to-order construction projects.  

The unit size is a single project, and IT costs can only be allocated on a project level. Of course, smaller companies that consider one project at a time find it near impossible to justify large license payments for enterprise IT solutions such as 5-D building information modeling (BIM), which adds the dimensions of time and cost to 3-D rendering.

Recent developments are now upending this logic, however, and we’re starting to see digitization really take off for two reasons. First, as has happened for many other industries, the costs and concerns associated with IT adoption completely change as we move to the cloud, which generally uses a monthly subscription fee model and can lower costs since hardware investment, including the installation of dedicated terminals, is not needed.

Second, the industry’s competitive frame of reference is changing. Up until very recently, construction and real estate companies operated almost exclusively in a local sphere. But Google, Facebook and potentially Amazon, have all indicated plans to move into real estate development, making it a more global landscape.

How long will it be before these corporate giants start competing in real estate development? For example, could we imagine a business model where apartments are provided at a lower price if tenants agree to share their data?  Big changes will likely need to occur before industry players can hold their own with such huge companies that use data-driven business models to reduce costs.

The good news is that a new generation of talent is now moving into the industry, and they’re eager to experiment with digital solutions. The advent of 5-D BIM as well as cloud computing, big data, and artificial intelligence (AI), creates the potential to transform the construction and real estate industries into the most advanced industries on the planet. We have reached a technological tipping point.

In real estate, for example, there are possibilities for buyers being more proactive in the process of designing their own spaces. Developers can offer people the opportunity to virtually explore unbuilt properties and make choices about things like the style of bathroom or kitchen. In future, that experience could be richer and deeper. Why not specify the exact materials, move walls around, import your furniture to see how it looks, and experience how the space will look and feel—and even smell? And it will be possible to do this with a friend or partner even if they are in a different country; you can meet in the virtual space and “walk” around together.

The same experience of course applies to train carriages, stations, or any other parts of the built environment. I could see a future where every large infrastructure project kicks off with a project expo where all stakeholders (planners, investors, and local residents) could come and explore the whole proposal. Participants could walk through spaces, fly over and around the whole scheme, and enjoy the views. I believe when people can understand the future they can get excited about it.  

Autonomous vehicle (AV) technology has a tremendous opportunity to reshape L.A.’s transportation infrastructure. Although AVs will spread slowly at first, as costs fall rapidly, they may eventually spread across the region even faster than the automobile in the 20th century. In the near-term, L.A. must proactively engage with industry, research, non-profit, and other government partners to shape the discussion about how they envision the AV future and seek to co-create it through joint testing, piloting, and deployment exercises.

L.A. must take advantage of the window of opportunity in the coming years to align the development of AVs with region’s vision, and by deliberately targeting technologies that build the foundation for the connected, data-enabled, shared, and electric AV future.

With that L.A. has the potential to drastically improve safety, mobility, and equity outcomes for Los Angeles‘s future transportation system. AV technology can potentially eliminate more than 90 percent of the crashes resulting from human error. Improved operational efficiency represents opportunity to extend the reach and service levels for city vehicle fleets while also increasing the efficacy of each transportation dollar spent.

In the process, AV technology can enable better mobility options for all, including senior adults, the disabled, and socio-economically disadvantaged, while also curbing traffic and greenhouse gas emissions by facilitating more efficient and optimized usage of vehicles. AV technology will not only reshape the transportation infrastructure of LA, it can also reshape the broader urban environment by decreasing road and parking requirements, enabling more green, pedestrian, and social spaces. See the City of L.A.’s plan here.

Technology is allowing for the potential of fleets of self-driving trucks, which would be much less expensive to operate than trucks driven by humans. Network effects could be a huge advantage as shippers gravitate to the fleet with the largest, safest trucking network. Today a small truck company can compete with a larger network for a particular job, but that will likely become more difficult. The ramifications will be enormous – if driverless autos clear safety and regulatory hurdles, they will displace the 1.7 million truck drivers employed in the country today.

Education & Workforce Development

Disproportionately the occupations that are declining are those that require only a secondary degree or less, and the jobs that are growing disproportionately require a four-year college degree or more. The technical and two-year degrees sit somewhere in the middle of that.

What this means is that we’re going to need to rethink education and it’s going to be very important to give people opportunities to learn technical skills to get the jobs that are going to be out there in a reasonable time frame.

The risk is that without sufficient investment in training, technology will relegate many more workers to the ranks of the low-skilled. To employ them all, pay or working conditions might have to deteriorate. If productivity optimists are right, the eventual problem may not be the quantity of available work, but its quality.

In his book, Robot-Proof Higher Education in the Age of Artificial Intelligence, Joseph E. Aoun explains the need for a curriculum based on the integration of three curricula: One is technological literacy, understanding how machines work, how to interact with machines, etc. The second is data literacy, understanding this enormous flow of information and how to navigate it and how to make sense of it. Third is human literacy, what we as humans do that machines are not able to replicate, such as creativity, innovation, entrepreneurship, the ability to be empathetic with others, the ability to work with others, understand their body language, work in teams, be global, be culturally agile.

(One paradox to take note of: “Workers in fully automatable jobs are more than three times less likely to have participated in on-the-job training, over a 12-months period, than workers in non-automatable jobs.” (OECD Study)

The key takeaway – lifelong learning is the most important aspect here, and it requires incentives for companies and organizations to provide opportunities for employees for lifelong learning. In the U.S., our financial aid has been geared mostly to people who are in a traditional college framework, which is for four years. We need to go beyond that. We need to incentivize people to go for certificates, to go for constant re-education and up-skilling.