Jobs, unskilled labour and perverse incentives for technological innovation - Economic Research Forum (ERF)

Jobs, unskilled labour and perverse incentives for technological innovation

Jobs, unskilled labour and perverse incentives for technological innovation

By Romesh


Day 3 of ERF’s 25th annual conference began with a plenary discussion of job-creating
growth in the emerging global economy. Keynote speaker Lant Pritchett of the
Blavatnik School of Government at the University of Oxford began by noting the key
challenge for developing countries, including the MENA region, over the next 20 to 30
years: to find productive employment for their ‘youth bulge’ – labour that is very low
skilled by global standards – and to generate at least some exports (depending on a
country’s natural endowments).


He then described the ‘place premium’: the huge gaps in the price of unskilled labour
between the United States and developing countries because of barriers to movement
across international borders. His research with Michael Clemens and Claudio
Montenegro finds that border-based barriers to low-skilled labour mobility into OECD
countries drive price distortions that are two orders of magnitude bigger than tariffs on
goods in any sector – as much as 1,000% higher wages for low-skilled US workers
compared with tariffs that rarely add more than 10% to import prices.


This evidence of what Pritchett describes as the biggest policy-based price distortions
in history are consistent with the high US spending on border law enforcement, with the
great willingness of would-be immigrants to evade restrictions in order to get into the
United States, and with the strong expressed desire of many people in developing
countries to move abroad.


He then turned to the perverse incentives for innovation created by distortions that
make unskilled labour both expensive and unavailable. What they are doing is creating
a world in which the scarcest resources – highly skilled entrepreneurs, innovators and
engineers – are being deployed to economise on one of the most abundant resources –
low-skilled labour.


This technological innovation – think, for example, of the richest people on the planet
seeking to destroy millions of jobs by developing self-driving cars – almost certainly
‘blows back’ into the developing world. One example is machine-based check-ins at
airports in India, a country in which there are large numbers of people who would be
willing to do that job but who have been replaced by technology.


The example of air travel led to Pritchett’s third focus: the incentives for firms to push
demand for labour out of traditional ‘jobs’. Rather than having travel agents book flights
and airport staff arrange check-in, consumers are involved in a process of co-
production. What the internet has enabled in that and many other interactions is akin to
what previous technological innovations, such as dishwashers and lawnmowers, did in
transferring possible jobs for others into ‘home production’. A related phenomenon is
restructuring employment contracts to avoid ‘jobs’, which is what happens with Uber
and Airbnb.


Pritchett concluded that rich countries are making life harder for developing countries
such as those in the MENA region by developing technologies that destroy demand for
low-skilled labour. Lower barriers to global migration are a potential solution, but it
may be necessary to follow the example of the Gulf countries of breaking the link
between opportunities for migrants to find employment and to obtain citizenship.


The Economic Research Forum’s 25th Annual Conference is held in Kuwait City, on 10-12 March, 2019, under the theme of Knowledge, Research Networks, and Development Policy. . Visit the conference website to find out more about the event and access papers, videos and blogs.