Money, Banks and Finance in Economic Thought

On the employment effects of new technology

Knell Mark, NIFU Nordic Institute for Studies in Innovation, Research and Education

Does the digitalization of the economy increase technological unemployment? Mokyr et al. (2015) suggests that technological advances over the past two centuries have created more jobs than were displaced. But more recently, Frey and Osborne (2017) have fueled fears that robots could displace almost half of all American jobs soon. But Arntz et al. (2016) found that only about 10% of jobs in the OECD countries are at risk of being replaced by new technology, although more than one third of tasks in each job will experience significant changes. This paper is about the employment effects of technical change and technological learning, and how these employment effects can affect social inclusion and stability, both in the past and in the present. This issue has been part of the policy discourse dating from at least the time of Adam Smith and the first industrial revolution, but can easily be put into the context of the ICT revolution and the emergence of new technologies and industries. New technology often resulted in unemployment over the short run, but there was no universal agreement on the long-term effect of the new technology. Smith believed that machines and workers were complementary to each other, and that workers will not be displaced. Theorists since Ricardo distinguish between the labour displacement effect arising from technical change and the conditions required to guarantee the eventual absorption (compensation) of displaced workers. Compensation theory asserts that free market mechanisms will reemploy laborers who have been displaced from their jobs by new technology. By contrast, displacement theory asserts that the conditions for compensation are not fulfilled sufficiently, if at all. The important theoretical consideration is whether the market provides for an endogenous (internal) mechanism that ensures compensation. How long these workers remain unemployed will depend on a variety of “compensating mechanisms” that make it possible for workers to be reemployed either with the same occupation or in a different branch of production. Any resulting unemployment will then be due to the balance between displacement and compensation. The narrative contains a rich policy discourse surrounding the compensation effects that includes both the classical approach (through dynamic input-output models) and marginalist approach (using new growth models) in its most modern forms.


Keywords: Technology, unemployment, compensation theory

Paper file