CHAPTER 2: LITERATURE REVIEW
2.7. The Economic Consequences of Adopting Automation Technologies
2.7.3. Drivers of Labour Market Polarisation
There are several factors which contribute to the polarisation of the labour market within and across different industries:
2.7.3.1. Technology and Routine (Skill)-Biased Technical Change
Acemoglu and Autor (2011) noted that the growth in demand for both high-skill, high-wage occupations and low-skill, lower-wage occupations is a key characteristic of labour market polarisation. This is the consequence of the differential effect technologies have across various areas of the skill and job task content distributions. The latter refers to the type of skills that are required to execute the tasks out of which an occupation consists of. Rapid and significant increases in technological capabilities, particularly ICT, have displayed a strong association with labour market polarisation and has been fundamental in shifting employment from manufacturing to service industries (OECD, 2017). Routine-biased technological change would therefore result in higher demand for both low- and high-skilled occupations relative to middle-skill routine occupations. This process culminates in the documented polarisation of labour market structures across most industrialised economies (OECD, 2017).
In general, ICT is complementary to the high-skilled labourers who perform complex cognitive tasks that require innovative reasoning to solve problems. These skills enjoy increases in demand as they are more advanced, abstract, and technically oriented, e.g., the design, development, and maintenance of software and hardware. As the demand for these skills increase, so do the accompanying wages for workers who are suitably skilled, particularly for those who attained scarce skills. The implication is that workers who have attained high-level skills will reap greater benefit from the automation and digitalisation of society (Le Roux, 2015:3).
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Middle-skill occupations are generally characterised as consisting out of routine tasks, i.e., well understood, precise tasks that are executed by following a set of instructions. Today, these labourers are experiencing increasingly weakening labour market conditions as the capabilities of current technologies have made automating and digitising the tasks in their occupations increasingly possible (Acemoglu & Autor, 2010).
Lower-skill occupations generally consist of non-routine tasks that require manual dexterity and hand-eye coordination, such as cleaning, gardening, catering, and various other interpersonal services. These tasks are difficult to automate on a large scale (Acemoglu and Autor, 2010).
A large share of the economy must consist of routine jobs for routinisation to result in polarisation, i.e., routine exposure must be high enough that rapid decreases in automation would trigger large dislocations of routine labourers. It must also be the case that non-routine and routine tasks are imperfectly substitutable so that the decreasing costs of automating routine occupations do not reduce the demand for non-routine occupations with it (Autor et al., 2003). Therefore, decreasing relative prices of investment goods will lead to higher routine exposure levels, larger labour-saving technological adoption rates, and aggravated labour market polarisation (Das & Hilgenstock, 2018:19).
2.7.3.2. Unionisation
Countries that have strong regulatory labour market institutions, such as unions that fight for higher minimum wages, can also expect to temporarily experience lower levels of labour market polarisation as low and middle skill level workers are sheltered by employment protection legislations.
Stronger unions are usually associated with higher minimum wages, which may also slow the reallocation of employment to the lower end of the occupational skill distribution, reducing polarisation effects. However, they do this by simultaneously increasing the risk for higher unemployment.
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Due to the strict rigidities imposed by unions, firms might also be incentivised to increase their capital intensity by adopting labour saving technologies to substitute labourers, as opposed to complimenting them in their work (OECD, 2017:24). This was illustrated in South Korea where militant labour unions regularly engaged in strikes (and other work stoppages), particularly in the automotive industry. In response, chaebols have opted to adopt labour saving technologies such as robotics to ensure production stability (Atkinson, 2019:6).
2.7.3.3. Globalisation and Supply Chains
A global value chain (GVC) describes the range of activities which are undertaken to deliver a service or product from its conception to its final use, and how these processes are distributed across geographical space and borders (Gravina & Foster-McGregor, 2020:8).
Technological development and trade (both local and international) are complementary forces which interact in complex ways to shape present day labour market structures (OECD, 2017:88). The development and expansion of GVCs have thus been accelerated by significant decreases in monitoring and transaction costs brought about by recent advances in ICT.
Corporations who compete in international markets would also not be able to establish GVCs without the capabilities of ICT, which allow for highly specialised long-tail markets on a global scale, in contrast to the homogeneous national markets generated by the mass production technologies of the 20th century (Fernández-Macías, 2018:10).
However, this process also quite often includes the offshoring of tasks generally performed by semi-skilled routine workers, further accelerating the polarisation of labour markets (Oldenski, 2014). In this manner globalisation tends to handicap lower-skilled, lower-earning workers who are not able to migrate. In contrast, it benefits the owners of capital, in particular large companies who possess the necessary resources that allow them to move their products and services across borders with ease, enabling them to capture new markets quickly and easily.
As such, the owners of capital tend to move (operations) to countries which have lower labour costs. By weakening their bargaining power, this process also occurs much to the detriment of smaller entrepreneurs, who subsequently face much higher barriers of entry into new and emerging local or international markets (Beno, 2019:7).
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The nature of labour market demand is therefore continually influenced by the growth of international trade as local firms would now have gained new incentive – in the form of increased consumer demand – to adopt automation technologies, which allow them to significantly increase output and efficiency (OECD, 2017:88). These processes fundamentally shape a country’s import and export composition. They therefore also determine which industry sectors face more competition as a consequence of increased offshoring and/or cheaper imports (Bhorat & Rooney, 2017).
The polarisation of the wage distribution is also associated with higher trade openness, i.e., upstream GVCs participation favours higher-skilled workers, while downstream participation favours lower-skilled labour (Gravina & Foster-McGregor, 2020:30). In developed countries, trade openness would also suggest a rise in the demand for, and thus higher return to, skilled labour relative to unskilled labour (Beno, 2019). Lower wages in emerging economies have significantly contributed to the offshoring of jobs and played an instrumental role in containing the spread of automation. However, as discussed, wage growth in these economies may provide incentive for local companies to adopt labour replacing technology (OECD, 2017).