The impact of technology – The Fourth Industrial Revolution?

Amazon has opened a shop in Seattle with no checkouts and customers who do not pay on leaving. Instead, with the appropriate app to link the shopping to an Amazon account, all that is needed is to go round the store, put items in a bag and scanners and sensors do the rest. After leaving the store, payment is debited from your account. There are no queues and no cashiers.  So successful has it proved that more have been opened. It already has three in Seattle and one in Chicago and plans ten by the end of 2018, 50 by the end of 2019 and, according to some press reports, 3,000 such shops within three years.

Electric cars have also been in the news over the summer, with a focus on how they will reduce the environmental damage from driving. What has been less well-publicised is their possible impact on the demand for workers in the factories of the future. Electric cars are easier to manufacture than current ones because their mechanism has fewer moving parts than the internal combustion engine. This means both that fewer workers will be needed and those on the manufacturing process will be less skilled, making it easier to outsource manufacture to other countries. However new technology in the motor industry could, potentially, have an even greater impact with the arrival of driverless vehicles. Uber is already looking into driverless taxis and black cab and white van drivers could become a distant memory in the same way that stokers on railways are no longer with us and blacksmiths are a rarity.

A robot is being developed, based on technology used in the NASA Rover to explore Mars, which will drive itself round battery chicken sheds, measuring the chickens by sight and checking their temperatures. This machine is likely to be popular if farmers face a shortage of labour after Brexit since they will replace human workers.

There is considerable dispute over the numbers and what the future will look like. Some suggest traditional, full-time jobs will decline and there will be an increase in remote working but overall, there will  be little impact on the number of jobs. Others argue that the impact will be positive, with new technology creating more jobs than are lost. They suggest there will be a much greater need for workers to develop, build and maintain the new technology and there will be some areas such as the care industry (growing because of an ageing population) where more human workers are likely to be needed to care for patients. McKinsey, a worldwide consultancy form,  recently predicted that robots will have the same impact on the global economy as the development of the steam engine, adding 1.2%pa to global growth by 2030.

A report by the World Economic Forum (The Future of Jobs, 2018), one of the more optimistic forecasters, has suggested that 42% of the world’s jobs will be done by machines by 2022, up from 29% today. It also estimates that although 75 million jobs will be lost by 2022, 133 million new jobs will be generated, resulting in an additional 58 million jobs. They see losses in administration, clerical, manufacturing, construction, legal, and maintenance sectors but increased demand for those in data analysis, management, computing, architecture, engineering, sales, education and training. Different numbers come from PWC, a worldwide firm of accountants, who predicted in July that about 7 million jobs will be lost by 2020 because of technology but 7.2 million will be created. They see losses in manufacturing, transport and public administration while the increases will occur in healthcare, science and technology and education.

Others are less optimistic. During the summer, Andy Haldane, the Bank of England’s chief economist, made the news by predicting that the impact of artificial intelligence could be more disruptive than previous industrial revolutions and would lead to widespread job losses. He argued that previously machines had replaced labour doing manual tasks whereas increasingly machines, because of developments in AI, are undertaking tasks previously thought to be beyond them. Mr Carney, the Governor of the Bank of England, suggested that the latest industrial revolution would threaten 10% of jobs in the UK and, while some workers would benefit from being more productive and earning higher wages, others, losing their jobs,  would not easily be able to find employment providing a reasonable standard of living and would need to be able to access education and re-training throughout their lives.

However the big issue will be that the people filling the new jobs are unlikely to be those losing the old ones. How society copes with this will be a major issue for the future.


Technology and unemployment

For many years people have worried about the rise of the robots and artificial intelligence. Science fiction writers have envisaged situations where robots gradually gain more intelligence and power until they are able to take over the world and whichever other planets feature in the story. Less exciting, but more immediately relevant, economists and politicians have also concerned themselves with the impact of the robots on society and particularly on the demand for labour. During eras of major technological change, it was predicted that the rise, firstly of steam, then electricity and more recently the computer, would lead to massive unemployment. Keynes, writing before the Second World War, predicted that new technology would drastically reduce the working week and we would have to tackle the problem of how to occupy our time with a 25-hour working week. In 1979 Fiat produced a now-famous advert for their new Strada ( ) under the slogan “handbuilt by robots” which showed the construction of the car in a spotless factory without humans, with everything done by robots.

A recent report, “The Future of Skills: Employment in 2030” by NESTA, an innovation charity, paints a relatively attractive future. They suggest that while 20% of the labour force is currently working in occupations which are likely to shrink, about 10% are in occupations that are likely to grow as a percentage of the workforce. Re-training will be necessary for the former, either to cope with the way their existing job has changed or to allow them to join the latter group. These industries include those working in teaching and education, hospitality, leisure, health care, and other jobs which require workers to deal with people, such as care for the elderly. Another group which will do well are those working in occupations which require higher-order cognitive skills such as psychologists. Those possessing creativity and communication and problem-solving skills will do well while those in jobs which can be more easily adapted to robots and artificial intelligence, such as those involving routine calculations and basic manufacturing skills will be lost. If you are seeking advice as to how to invest your portfolio, it is already possible to put all the necessary information such as your attitude to risk, how much you have available to invest and for how long and a computer algorithm will devise your optimal portfolio.

Deliveroo riders seek to unionise and gain workers’ rights – BBC News

Couriers working for food delivery service Deliveroo take legal steps to gain workers’ rights.

Source: Deliveroo riders seek to unionise and gain workers’ rights – BBC News

Deliveroo drivers, much like their counterparts at Hermes, Amazon, Uber, etc, are part of the growing ‘gig’ economy, where firms pay individuals for a one-off activity, such as the delivery of a takeaway. This is instead of being paid by the hour or a salary and, thus, becoming an employee of the firm.

Being paid per delivery has its benefits in terms of flexible working arrangements, you can decline a job if you wish, but can restrict earnings should there be a slow day/lack of demand. As a result, drivers at Deliveroo complain that they often earn below the national living wage per hour. In addition, as they are paid per ‘gig’ and not as employees they are not entitled to worker protection measures such as holiday pay, sick pay, pension contributions, etc.

The Independent Workers of Great Britain is expanding as a result of the booming gig economy and is seeking to become recognised as a union by the likes of Deliveroo in order to engage in collective bargaining and protect the rights of this growing number of workers. Unsurprisingly, firms are resistant and instead are keen to stress the benefits of such employment, i.e. flexibility and the potential to earn more than if you were paid by the hour or a salary. However, it is obvious to all that this is a way for firms to keep costs down.

Investment banks and bonuses – what’s going on?

Traditionally large US investment banks have proved to be lucrative places to work.  Very large profits have provided shareholders with attractive dividends and employees with both high salaries and considerable bonuses.  Consider the following statistics.  In 2010 Goldman Sachs set aside $15.3bn to pay its staff both salaries and bonuses, down 5% on the $16bn it set aside the previous year, but still an average of $430,000 each.  Furthermore, total bonus payouts on Wall Street were $20bn in 2012, 8% more than the preceding year; and remember that figure refers to bonuses, so basic salaries are not included.  In 2013 Barclays decided it would be appropriate to set its bonus pool to £2.4bn, an increase of 10% over the preceding year, despite the fact that annual profits at the bank fell by 32%.


However, as a recent series of articles, such as the one below from the BBC News website show, revenues and profits at the “bulge bracket” investment banks are suffering.  Bank of America Merrill Lynch reported a fall in income in the third quarter of 2014 and Citigroup announced that profits were 27% lower in the first quarter of 2016 than they had been in the first quarter of 2015.  In 2015 Credit Suisse made an overall loss of $2.92 billion and at JP Morgan profits fell by 54% in the first quarter of 2016 compared to the first quarter of 2015.  In addition, times at Goldman Sachs, nicknamed “Gold mine Sachs” thanks to its generous payments to employees, have turned very tough with a fall in revenues of 40% in the first quarter of 2016 compared to the previous year. Overall, the picture for these banks is not good in terms of profits or revenues.

Many readers will now be very concerned about the fate of the employees in the investment banking divisions of these firms.  Will they continue to enjoy the salaries and bonuses they have come to rely upon to support their lifestyles?  Well, no-one at Goldman Sachs needs to worry too much.  The management have decided to set aside $2.66 billion for its bonus pool in the first quarter. That worked out to an average of nearly $73,000 per employee for the first three months of the year.  At the end of 2015 JP Morgan also decided it would leave its bonus pool roughly unchanged from 2014, despite falls in revenues and profits compared to the previous year.

This flies in the face of economic theory.  Bonus payments at all sorts of firms are designed to solve a dilemma known in economics as, “the principal-agent problem”.  It occurs when an actor in a transaction, the principal, pays another actor in a transaction, the agent, to carry out some work on their behalf.  The problem comes if the principal has different objectives in undertaking the work from the agent.  Consider a situation where your boiler breaks down in the middle of winter and you call a plumber to fix it.  In this case you are the principal and the plumber is the agent and the work is the repair of the boiler.  Your objective is to have the boiler fixed as quickly and cheaply as possible but the plumber’s objective is to make as much money as possible from the repair.  You may find that the plumber carries out work which is not really necessary, or claims that the boiler cannot be repaired and quotes for the replacement of the boiler, when in fact the fix is simple and cheap.  This occurs because the plumber wants to maximise his profits and so has different objectives to you.

In the context of an investment bank the principals are the shareholders, who want the bank to operate as profitably as possible, and the agents are the employees.  Employees’ objectives might include having an easy life, taking unnecessary risks in trading activities for the thrill of it and leaving work early to go and play golf.  None of these will maximise profits.  In order to keep the agents’ objectives aligned with those of the principals a bonus payment is made to the agent but theory suggests it should be very closely aligned to profit, otherwise it is useless.  Therefore, if a loss is made there cannot be a bonus and any fall in profits should lead to a commensurate fall in bonuses.  The evidence from bulge bracket US banks suggests that bonuses are not being used this way.

It can only be concluded from all this that, as in many other areas, the labour market theory and the labour market practice in the area of bonuses don’t seem to be the same.  Nevertheless, it probably does not concern employees in the financial services industry too much.

BBC News online article here:


CEO pay – an example of economic rent, rather than transfer earnings?

A recent report by the London School of Economics (LSE) on executive pay has cast light on a rather forgotten corner of labour market theory – that of economic rent and transfer earnings.  The wages of most workers can be divided into two different parts.  The first part is the transfer earnings, or money which must be paid to the worker in order to persuade them to do the job.  This can be thought of as the bare minimum the worker will accept.  This may well be affected by such factors as the next best employment option open to them and the wages it might bring.  The rest of their salary is known to economists as economic rent, or the extra they receive above their transfer earnings.  This can be seen as the earnings equivalent of supernormal profits to a firm.  It is extra payment which the worker does not really need in order to persuade them to do the job, but which they receive in any case.

The recent LSE report, prepared after extensive interviews with the headhunters who recruit CEOs, came to some interesting conclusions.  The first is that the average annual salary for a FTSE 100 CEO is now £4.6m per year.  It is often suggested that the for most of those individuals the vast majority of this money represents transfer earnings rather than economic rent.  Why?  Those of us who earn considerably less, which is statistically most of us, are told that there are very few who can actually do such jobs and that there is a global market for this limited supply of very talented individuals.  If large UK firms do not pay these high salaries then these workers will go elsewhere, particularly the US.  In other words, the opportunity cost for them in accepting a job with a UK firm is very high because of the other options open to them.  Therefore, even if their salaries are in the eye-watering region of £4.6m, they are receiving little in the way of economic rent.

However, they LSE reveals that headhunters think differently.  Firstly, they describe most FTSE 100 CEOs as “mediocre” and they comment that 100 people could have filled the job just as ably as those who actually are chosen.  This suggests that these workers are not as limited in supply as they themselves would have us believe, and therefore that the opportunity cost for them of accepting a CEO post might not be as high as the picture they have painted because they would find it difficult to earn such a salary elsewhere.  If much of their salary is, in fact, economic rent then labour market theory suggests it can quite safely be taken in the form of tax without altering their behaviour in the slightest and without affecting economic efficiency  It is possible that Thomas Piketty could make some useful suggestions in that direction………..

Links to newspaper articles on the LSE reports can be found below: