Future of work: Job destruction, income constraints and information
Phuah Eng Chye (16 February 2019)
Job destruction is accepted as an inevitable consequence of creative destruction; the destruction of the old to make way for the new. Creative destruction is made palatable by the many new products and conveniences that represents progress. Could you imagine that instead of annual smartphone launches, you had to wait for months to install a telephone with a limited choice of colours. Who would want to go back to the old days? Yet up close, the rapid pace of innovation also meant firm closures and significant job losses, especially of unionised manufacturing jobs. Thus, innovation is usually resisted by incumbents and those whose lives are uprooted.
The effects of creative destruction are uneven. For example, workers bear the brunt of the impact from job losses due to downsizing or closures. But companies and economies can adapt through innovation and reorganisation to overcome the effects of creative destruction.
It is worth noting that the interests of workers and country diverge from the interests of corporations as markets and shareholders become increasingly globalised. The mantra of “what was good for our country was good for General Motors, and vice versa” no longer applies. This distinction is noteworthy because it implies the benefits of protecting or rescuing distressed “national” corporations has diminished considerably. Policies need to be geared to a globalised landscape rather than to a “national” economy or “local” community.
Whether a country opts for a quick or gradual adjustment to creative destruction, it should not lose sight of the need to steer companies and economies in the right direction; namely to be re-positioned for recovery through nurturing new sources of job creation. Therein lies the disadvantage of resisting change. When an operation or product life span is extended beyond its useful economic purpose, the delay can distract focus, impede reorganisation, drain corporate and fiscal resources and result in the unnecessary accumulation of financial and fiscal debt. This will magnify the adverse consequences of creative destruction as by the time it is evident, the country’s resources will have been exhausted. This will reduce the country’s financial ability to support investment to nurture new sources of growth.
I suggest there is also a need to differentiate between creative destruction and capital destruction. “It is not creative destruction – the closure of businesses due to technological innovation – that policy-makers should attempt to manage. Markets do a far better job of deciding which products, firms and industries should stay in business and which should be closed. What needs to be managed is capital destruction”. Capital destruction are the financial losses that materialise when incumbents are upended by innovative products and services.
In this context, income acts as a mechanism to ration the use of resources, especially labour. Firms are subject to the financial discipline of profits, returns and balance sheet liquidity. It is not just loss-making or financially-distressed companies that are forced to lay off employees. Even profitable companies are compelled by competitive pressures to seek cost efficiencies, rationalise excess capacity and to reconfigure their operations as part of a global value chain. Hence, workers are retrenched because their jobs are relocated, replaced or automated to reduce costs. The expectation for corporations to maximise shareholder value raises the income bar higher. Operations not meeting a profit hurdle rate are at risk of being sold or closed. Globalisation means firms freely destroy jobs at a higher cost location and rehire at a lower cost location. When capital destruction is not carefully managed, there can be systemic consequences with losses on asset values leading to the bankruptcy of large firms, state enterprises and financial institutions. Hence, income constraints rather than technological advancements are the decisive factor shaping job outcomes.
The checks and balances operate differently at the national level. Governments have considerably greater leeway to run budget deficits. However, preserving jobs by keeping zombie companies alive require direct infusion of funds, government purchases and incentives. The budget will come under strain as costs mount. Governments might need to cut other fiscal expenditures and welfare payments which will dampen aggregate demand. The economy will also become more inefficient if higher taxes, tariffs or prices are imposed.
The income constraints could also be structural. Since the 1980s, governments have been restructuring the public sector workforce to control fiscal expenditures. Initially, there was room to trim maintenance and other operational costs and through privatisation. At some point, governments ran out of room for non-wage cost-cutting, particularly as wages began to account for a significant proportion of operating expenditures. In this regard, some civil service professions may be able to successfully negotiate for higher pay but generally governments would likely not be able to afford an across-the-board pay rise for all civil servants.
Governments that perpetually cut fiscal expenditures on welfare and wages are locked onto a path of self-destruction. Continuous cost-cutting reflects something has gone awry with public sector management and policies. It would seem that allocations for public sector wages and welfare are being squeezed by policies that contribute to rising private sector profits. It is also unlikely to be a coincidence that living costs have soared relative to wages. Governments need to re-examine their fiscal policies – subsidies, incentives, tax cuts and privatisation – in relation to how they have contributed to corporate profitability. If governments are constrained in increasing wages, then they should use their influence to keep the costs of living low.
These arguments need to be considered within the context of the broader debate on fiscal discipline. One argument is that a large fiscal stimulus is needed to offset the contractionary effects of private sector savings. Richard C. Koo explains that the “balance sheet recession tells us that the deflationary gap in an economy facing such a recession is equal to the amount of private unborrowed savings. In other words, private financial institutions hold unborrowed savings equal to the amount of fiscal stimulus needed to stabilise the economy. Financing the fiscal deficits needed during a balance sheet recession will not be a problem as long as those savings flow into government debt.” He notes curbing fiscal expenditures will end up widening the deficit because the economic contraction will cause fiscal revenues to fall even faster. On a similar basis, arguments have also been put forward that fiscal deficits don’t matter.
These views need to be qualified. There may be an exception for reserve currency countries but it doesn’t apply to most other countries. Fiscal wastefulness eventually shows up as increased indebtedness and financial fragility. If governments are unable to control fiscal deficits and increase export earnings, they face the risks of capital outflows and currency and domestic interest rate instability which will lead to job destruction among other consequences. Hence, economic recoveries need to be preceded by disciplinary and stabilisation measures before economic recovery and job creation issues can be addressed. In this context, the more important point doesn’t relate to balancing the books but as to whether governments are using money and other resources to good effect.
I earlier mentioned the interest of corporations had diverged from that of workers and the economy. The point to note is that as market “space” becomes increasingly globalised, this shrinks the “space” for domestic companies to survive. This highlights the risks of a policy model of rearing national champions or supporting national flagships – protecting domestic firms reduces growth potential. Most economies are better off being agnostic about ownership – so long as firms inject resources, keep workers employed and pay taxes. Governments should therefore favour policies that enlarge global interactions to create more jobs rather than to attempt to preserve jobs by keeping economic activity domestic.
Hence, income expansion and contraction are related to the level of globalisation. Balance of payments constraints can be eased by raising foreign currency revenues from foreign direct investment and through sales of domestic assets. It is typically difficult for foreigners to buy local assets, particularly when they are distressed, due to the manoeuvring by politically-connected local owners. At the same time, there is widespread suspicion that the international institutions assist foreign investors to take advantage of crises to buy local assets on the cheap; an event referred to as fire-sale FDI. Hence, the asset sale process needs to be managed from a political as well as economic dimension.
The final point to consider is that the perspective of job destruction varies according to the paradigm. Under a production paradigm, job destruction is described as technological unemployment. In an information paradigm, job destruction can be described as an outcome from reorganisation in reaction to information disruption. During the transition from lower to higher information content, it is mostly production jobs that get destroyed. There are various aspects of information-driven job destruction to consider.
- Virtual replacement reduces the need for labour related to physical assets e.g. retail stores. The Internet of Things (IOT) and the shift to modular production makes traditional infrastructure (referred to as stranded assets) redundant. Jobs and capital related to these assets will be destroyed.
- Transparency facilitates efficient use of resources by identifying areas where there is excess workers and idle time. Sharing increases asset utilisation and cannibalises existing income streams. Transparency can thus have expansionary and deflationary effects and this in turn can be highly influenced by regulation.
- The disconnect between size and production. The largest companies are no longer the largest employers. This leaves a vacuum in relation to the volume aspect of job creation. In addition, the success of the largest companies will crowd out the smaller companies.
- Increasing speed of change accelerates the destruction of permanent jobs and results in the creation of more transient or flexible work.
Attempts to preserve production jobs are unlikely to be succeed. Economies unable to wean themselves off from their dependency on production-based job creation will find their economic growth stalling. Therefore, policies need to be oriented towards intensifying the creation of information jobs. This will require the support of policies that expand the use of information and increase the level of participation and monetisation.
Overall, it is not the income constraints that hamper job creation but the lack of a vision to underpin a cohesive growth or recovery strategy. In particular, there needs to be greater clarity as to whether, over the long term, governments should be expanding or contracting their role; and in which areas. Only then, will policy be able to direct the purposeful use of financial and human capital.
Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
Phuah Eng Chye (5 May 2018) “Technology and work: Technological unemployment and will this time be different?” Economicsofinformationsociety.
Phuah Eng Chye (28 July 2018) “Future of work: Information disruption”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/future-of-work-information-disruption/
Phuah Eng Chye (29 September 2018) “Future of work: The labour movement (Part 2: Labour as a social movement)”. Economicsofinformationsociety.
Phuah Eng Chye (5 January 2019) “Future of work: Re-defining work (Part 6: Monetising participation)”. Economicsofinformationsociety.com.
Richard C. Koo (2015) The escape from balance sheet recession and the QE Trap – A hazardous road for the world economy. Wiley
 “For years I thought that what was good for our country was good for General Motors, and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country. Our contribution to the nation is considerable”. Charles E. Wilson (1952). https://en.wikiquote.org/wiki/Charles_Erwin_Wilson.
 Phuah Eng Chye Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
 Phuah Eng Chye “Future of work: The labour movement (Part 2: Labour as a social movement)”.
 Anorexic risks refer to a situation where government expenditures end up as corporate profits. For a more detailed description, see Phuah Eng Chye Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.