(This essay was published in South China Morning Post on 21 January 2015.)
Many today believe the world has entered the Third Industrial Revolution, where technological improvements in robotics and automation will boost productivity and efficiency.
These advancements have three biases: They tend to be capital-intensive (favoring those with financial resources), skill-intensive (favoring those with a high level of technical proficiency), and labor-saving (reducing the number of unskilled and semi-skilled jobs).
The pundits speculate the economic impact on the job market will be significant, and present serious social and political challenges in terms of growing inequality and the provision of safety nets to mitigate the consequences of disruptive technological progress. The concerns are three-fold.
First, it is uncertain whether demand for labor will continue to grow as technology marches forward. If not, there will be serious dislocations and worsening inequality. This is a particular concern for semi-skilled workers.
If the Third Industrial Revolution continues to spread globally, then Asia’s Second Industrial Age might end swiftly. Hong Kong’s encounter with the old manufacturing era lasted only one generation before it became a service economy.
Second, the rapid development of smart software is transforming the old service economy. In the “on-demand” economy, computer power joins hands with freelance workers. Uber is an example of this.
In the West, in the Second Industrial Age that ended last century, workers were protected from unemployment, penury in retirement, and health and safety risks either by the welfare state or their employers.
In the “on-demand” economy, such risks are pushed onto individuals, even more so if on-demand services are organized across national borders. New approaches have to be found to mitigate the associated economic and social risks. Governments are usually poorly informed and incentivized to do this.
Third, the new technology has a winner-take-all effect that is driving the rise in income and wealth inequality. This may not necessarily pose an economic challenge for society, but it is likely to provoke social and political concerns.
The future presents at least two challenges: economically it is about good jobs and socially it is about safety nets. Which industries will be the employment growth areas? And can they provide social safety nets?
Employment in industries experiencing slow technological progress, like education, will increase faster than industries with rapid productivity growth, like telecommunications. This is because the former have to hire more workers to increase output by amounts commensurate with rapid-growth industries.
Employment growth will be even stronger if, over time, the demand for products in slow productivity growth industries rises faster than incomes, as in education. Investing in education also helps people to acquire the requisite skills to secure good jobs in the new technology-driven economy. Education will naturally become a major employer in future.
Health care is also expected to offer employment opportunities even though it has experienced rapid technological progress. This is because demand is rising as incomes grow, more diseases are now treatable, and the population is ageing globally.
While these industries will offer employment, a social safety net is still needed, particularly for older workers who have less incentive and ability to acquire new skills.
The social welfare state of the 20th century is no longer an affordable solution. Governments are also not best-positioned to address the problems because they are too diversified and not sufficiently specialized in any single task; require immediate results; and find it hard to abandon programs once they are introduced.
They also find it difficult to set goals and targets for addressing social needs given the many overlapping constituencies involved.
Thirty years ago the late management guru Peter Drucker argued in favor of deploying non-profit corporations to tackle hard social problems. This Third Sector would be competitive, focused on a single objective through specialization, and receive funding from public and private sector sources and customer payments.
The Third Sector has grown rapidly in recent years and will almost certainly be the most important employer in the new technology-driven era. Both education and healthcare should properly be in the Third Sector. This will make them more efficient and competitive, and best able to create jobs in future. For-profit business enterprises would also play a role by providing donations, purchasing services, or directly organizing corporate social responsibility activities.
There is, therefore, a path for addressing the economic and social challenges that will arise from the economic upheavals of the Third Industrial Age. For-profit business enterprises must stay efficient and profitable to fund growth in the Third Sector. Non-profit enterprises must become more efficient and competitive like their counterparts in the for-profit sector to create more good jobs.