Future of work: Other information effects – polarisation and transience

Future of work: Other information effects – polarisation and transience

Phuah Eng Chye (18 August 2018)

The previous article discussed how intangibility changes the nature of work. Intangibility can combine with the other information effects[1] of speed, size and transparency to change the organisational structure of work. This article discusses the information effects that gives rise to polarisation and transience.

Polarisation can be defined as the expansion of the top and bottom segments and the diminishing of the middle segment. It is the outcome of the combined information effects of intangibility, size, speed and transparency which facilitate scaling in a short space of time. This results in simultaneous concentration (at the top segment) and fragmentation (at the bottom segment).

There are many examples of polarisation in financial markets[2]. Intermediation is highly concentrated with the bulk of trading occurring among the world’s largest global banks and investment institutions in a few products. The fragmentation effect is reflected by how the remaining and small amount of liquidity is thinly spread out across an expanding range of products and market venues. In this regard, the long tail theory is incomplete because it focuses on the fragmentation of products but neglects to mention the concentration of intermediation which is occurring simultaneously.

Polarisation features prominently in the work landscape. Polarisation is often associated with the flattening of hierarchies, the shrinking of the middle class and widening inequalities. A number of theories[3] such as the fissured workplace, the Winner-Take-All (WTA) and superstar firms provide overlapping versions of the occurrence of polarisation.

Polarisation is multi-dimensional and reinforcing. Mainstream research suggests employment is stratified by routine and non-routine work and by income or by education. Henry Siu and Nir Jaimovich point out “employment in routine occupations has been disappearing…occupations focused on routine tasks tend to be middle-waged. Thus, the disappearance of routine occupations in the past 30 years represents a polarisation of employment because the middle of the wage distribution has been hollowed out…all of the per capita employment growth of the past 30 years has either been in non-routine occupations located at the high-end of the wage distribution, such as software engineers and economists, or in low-paying jobs, such as service occupations like restaurant waiters and janitors.”

David H. Autor similarly suggests “computerization of routine job tasks may lead to the simultaneous growth of high-education, high-wage and low-education, low-wages jobs at the expense of middle-wage, middle education jobs…Cumulatively, these two trends of rapid employment growth in both high and low-education jobs have substantially reduced the share of employment accounted for by ‘middle skill’ jobs. In 1979, the four middle skill occupations (sales, office and administrative workers, production workers, and operatives) accounted for 60% of employment. In 2007, this number was 49%, and in 2012, it was 46%.”

Polarisation is also evident in the tiering of jobs by skills and age. Jeffrey D. Sachs and Laurence J. Kotlikoff note technological innovation can reduce the marginal productivity of low-skilled workers while raising the marginal productivity of high-skilled workers. “This not only increases the income gap between skilled and unskilled workers, but also has a generational effect, raising the incomes of the older generation while lowering the income of the young. This effect occurs because the old have accumulated physical and human capital, while the young are endowed with unskilled labor.”

Polarisation is reinforced by the concentration of attractive job opportunities in large superstar companies and crowded cities. Joel Kotkin observes “information, particularly its media segment, has shown a strong proclivity to concentrate in a handful of places. Whether it’s a matter of where venture funds are concentrated, or that cross-fertilization and creative flair are driving this, it’s hard to say. But in the emerging digital economy…clusters industries in the places where creators of content live. For the most part, as of yet, blue collar metro areas need not apply.” Concentration means a few people or firms headquartered in a few locations would account for the bulk of revenues, income, market capitalisation or liquidity.

Ahmad Alabdulkareem, Morgan R. Frank, Lijun Sun, Bedoor AlShebli, César Hidalgo and Iyad Rahwan suggest the persistence of occupational polarization can be explained by the connections between skills: how workers transition between occupations, how cities acquire comparative advantage in new skills, and how individual occupations change their skill requirements”. In this context, “our analysis provides evidence that cities, occupations, and individual workers leverage the complementarity between skills to navigate changing labor demands and to facilitate career mobility”.

Broadly, Bruno Palier describes polarisation as “part of the movement towards dualisation, which is forcing apart labour market insiders and outsiders in an ongoing process that amplifies trends that have been detectable since the 1980s.” “The economic literature on the polarisation of the labour market does not question the fact that they are bad jobs because they are regarded as low-productivity jobs occupied by low-skilled people. The only indicator of the low productivity of jobs is the fact that they are low paid, which – according to orthodox neoclassical economic theory – reflects the fact that the productivity is low. However, it might be that more and more people have to compete for these low paid interpersonal services jobs as a consequence of the displacement of mid-skilled employment”.

Hence, “against the backdrop of a polarised labour market, a new form of social polarisation is forming, with the emergence on the one hand of an internationalised creative class, with global connections, living in the heart of global urban centres, and on the hand a class of people at their service – to take care of their children, to care for them, to serve them in restaurants, to transport them (by taxi or Uber), to build or renovate their homes, to educate their children, and to provide healthcare to them and elderly relatives”.

Bruno Palier notes this is giving rise to economic cleavage “with a disproportionate increase in resources and security concentrated on one side of modern society, and a growth of low-paid, precariousness and new social risks concentrated on the other”.

“Some societal groups are overrepresented as outsiders…women, young people, the low-skilled, immigrants and second generation migrant workers, in particular if they are employed in the services sector. These groups have higher unemployment rates than average, are more likely to be in atypical employment, and more likely to be poor and to suffer from the insufficient social rights.”

Hence, polarisation manifests in multiple forms rather than in a single form of inequality. The rich 1% of population benefits from the concentration of income, wealth and privileges in their hands. But the remainder of income and wealth is fragmented as it needs to be shared across the majority of the population. On the business front, fragmentation is associated with smallness, granularity and dispersion. In this regard, markets are increasingly dominated by a few firms. Many small firms are unable or unwilling to achieve scale and they are subject to high failure rates, underinvestment, budget cuts, and job cuts. Hence, polarisation in one dimension is usually reinforced in another dimension. Inequality can thus be reinforced by class, geography, race and gender and through the negative side effects on dynamism and mobility.

Another prominent outcome of the information effects is transience. The industrial workplace was built on long-term relationships with customers and employees. But improvements in speed and flexibility has shortened the life cycles of processes, products and firms. One of the way firms have attempted to cope with transience is to rely on flexible work arrangements. Essentially, transience transforms work from a long-term employment relationship into an unbundled[4] transaction at a point in time. Flexible work arrangements allow firms to strengthen their resilience to transience by minimising the inventory of (idle) staff time and by reducing staff costs. Hence, advocates argue flexible work arrangements facilitates innovation by firms and inividuals and that it also enhances competitiveness.

The threat posed by transience and flexible work arrangements is not unemployment but the employment and income uncertainties it generates that leads to higher social insecurities. Monique Kremer, Robert Went and André Knottnerus highlights point out flexibilisation can reduce the level of commitment between workers and firms. This can cause employers and employees to invest less in training, knowledge enhancement and the acquisition of new skills. This “can have negative consequences for the innovative power of the economy as a whole and for the accumulation of human capital, and therefore for the economy’s capacity for growth in the long term.”

In addition, the faster pace of obsolescence means training and education cannot keep up with the latest development – which occur real-time and are increasingly AI-driven. By the time, the training and educational programs are rolled out, they are outdated. Rapid obsolescence reduces the value of skills and impedes efforts at reskilling as a response to worker displacement. This limits the scope for improving productivity and wages in the low value-added segments. In relation to this, skill constraints and location-related costs can also affect worker mobility or their willingness to move to where the jobs are.

Transience also has a direct macroeconomic impact. In particular, there is concern that the widespread practice of flexibilization is dampening wage growth. Monique Kremer, Robert Went and André Knottnerus notes that “when flexibility is used to circumvent or evade rules, terms of employment or institutions, it amounts to substituting better jobs for lower quality work.” The income and job uncertainties introduced by flexible work will lower household expectations of permanent income and dampen aggregate demand.

In this context, Monique Kremer, Robert Went and André Knottnerus highlights that “work is more than just an activity. It is a key factor in determining income, status, recognition, social relationships and well-being”. They note “many survey studies do however show a direct link between temporary employment and a lower level of well-being, health problems and stress”.

“Academic literature shows that negative psychological effects often relate to three dimensions. The first is that temporary workers are often peripheral workers. No-one invests in them and there is no long-term commitment (reflected, for example, in lower pay, poorer employment terms and less chance of promotion). The second explanation is that temporary work is of poor quality. People hired on a temporary basis have relatively little control of the work they do. The third explanation is that flexible workers are constantly engaged in meeting the demanding requirements to keep the job, or are constantly looking for work”.

Hence Monique Kremer, Robert Went and André Knottnerus note “people who experience insecurity in the labour market cannot or dare not commit to the long term. It is still the ideal of many young adults to get married and settle down, although this is felt more strongly by the less well educated than by the better educated. However, because of flexible working, young adults do not feel that they can build their life. They often have problems at the first stage – finding a suitable home – and say they postpone having children until one of the two partners has a permanent job. Those educated to lower and secondary level, in particular, perceive the lack of life course prospects to be very negative and frustrating. They describe how they cannot look to the future and remain stuck in the present”.

Overall, the features of polarisation and transience have profound social and political consequences. The industrial blueprint for society relies on a bulging middle class and permanent jobs to underpin economic growth and social stability. But businesses have been quick to change their organisation of work in response to information disruption. As work relationships became more opportunistic, the labour share of income has fallen and social protections have been weakened. As Monique Kremer, Robert Went and André Knottnerus suggest, these developments have “undermined the fiscal basis of the traditional welfare state and introduced “new forms of social domination” that relies “not so much on owning the means of production but rather on possessing human capital, knowledge and creativity”.

Economists struggle with designing the right strategies to cope with the pressures from polarisation and transience. Monique Kremer, Robert Went and André Knottnerus suggest “as soon as employers invest in temporary workers and as soon as the job provides greater autonomy and people do not have to push themselves to the limit, the psychological effects of a temporary contract do not have to be negative. In short, temporary work does not necessarily lead to psychological insecurity. However, in that case, the work must no longer take place at the margins and people must have sufficient autonomy.” Hence, “bad flexibilization” can be reduced.

In addition, Monique Kremer, Robert Went and André Knottnerus note “flexibility is not the obvious choice for work that has little or nothing to do with cross-border trade – e.g. education, healthcare, cleaning work – and work for which it is also important to retain specific, long-term knowledge. “The choice of type of employment contract should be dictated by the nature of the work and not by cost considerations, which are often likely to be a factor now”. The question to ponder on is whether the fostering of entrepreneurship and enterprise “necessarily require less permanent employment relationships.” Hence, consideration can be given to devising strategies and organising “incentives to encourage more permanent contracts, but only where it is necessary, without creating too much rigidity in the labour market”.

But repealing the forces of polarisation and transience is an uphill task. To be fair, businesses are merely reacting to incontrovertible forces rather than driven by monopsony or capitalist motives. In fact, it is difficult to even apply the traditional notion of monopsony to the new platform “monopolies” because they don’t hire many employees.

What if the middle class can’t be rebuilt due to polarisation? How would society manage a situation where a large percentage of the population could no longer be assured of a job and future income streams and hardly owned any assets? In addition, transience undermines relationships and reduces the sense of responsibility and accountability. What ideals could be used to motivate cooperation and governance as a safeguard against self-interest?

There are no obvious answers to these policy dilemmas yet. Labour and economic reforms should not attempt to force “work” back into an industrial stereotype. The challenge is to explore how policy objectives and labour regulation can be reset to be in synchronisation with information disruption.

References

Ahmad Alabdulkareem, Morgan R. Frank, Lijun Sun, Bedoor AlShebli, César Hidalgo, Iyad Rahwan (18 Jul 2018) “Unpacking the polarization of workplace skills”. Science Advances Vol. 4, no. 7. http://advances.sciencemag.org/content/4/7/eaao6030

Bruno Palier (2018) “The politics of social risks and social protection in digitalised economies”. From Work in the digital age: Challenges of the fourth industrial revolution edited by Max Neufeind, Jacqueline O’Reilly, Florian Ranft. Policy Network, Das Progressive Zentrum. Published by Rowman & Littlefield International Ltd. http://bruegel.org/wp-content/uploads/2018/07/Work-in-the-Digital-Age.pdf

David H. Autor (3 September 2014) “Polanyi’s paradox and the shape of employment growth”. NBER Working Paper No. 18629. www.kc.frb.org/publicat/sympos/2014/2014093014.pdf

Henry Siu, Nir Jaimovich (6 November 2012) “Jobless recoveries and the disappearance of routine occupations”. http://www.voxeu.org/article/jobless-recoveries-and-disappearance-routine-occupations

Jeffrey D. Sachs, Laurence J. Kotlikoff (2012) “Smart machines and long-term misery.” Working Paper 18629. National Bureau of Economic Research. http://www.nber.org/papers/w18629.pdf

Joel Kotkin (6 June 2016) “The cruel information economy: The U.S. cities winning in this critical sector.” Forbes. https://www.forbes.com/sites/joelkotkin/2016/06/06/the-cruel-information-economy-these-are-the-u-s-cities-winning-in-this-critical-sector/#5a3798023cd5

Monique Kremer, Robert Went, André Knottnerus (May 2017) “For the sake of security, the future of flexible workers and the modern organisation of labour”. The Netherlands Scientific Council for Government Policy (WRR). WRR Investigation No. 36. file:///C:/Users/user/Downloads/V036-For-the-sake-of-security%20(1).pdf

Phuah Eng Chye (19 May 2018) “Labour share of income (Part 1: Theories and measurement)”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/labour-share-of-income-part-1-theories-and-measurement/

Phuah Eng Chye (20 January 2018) “The sharing economy: A futuristic taxi landscape (Part 2 – Modular regulation)”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/the-sharing-economy-a-futuristic-taxi-landscape-part-2-modular-regulation/

Phuah Eng Chye (29 July 2017) “The significance of information effects”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/the-significance-of-information-effects/

Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information societyhttp://www.amazon.com/dp/B01AWRAKJG

[1] Phuah Eng Chye Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.

[2] Phuah Eng Chye Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.

[3] Phuah Eng Chye “Labour share of income (Part 1: Theories and measurement).

[4] The unbundling of wages from benefits and social protection.

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