Are robots taking over jobs? The advancing digitalization has far-reaching macroeconomic effects. Of particular public interest is the question of whether robots, computers and artificial intelligence are taking people’s jobs away. The answer to this question depends largely on the period under consideration.

Replacement effects of digitalization

The advancing digitalization has already led to the fact that machines have largely replaced human labor in many areas of activity: Ticket and ATM machines are replacing counter staff, fully automated production lines are producing goods with almost no human support, and in the financial services sector online banking, online insurance and online securities trading are replacing bank employees, insurance brokers and stockbrokers.

The substitution of human labor in production by robots, machines, computers and artificial intelligence (hereinafter referred to as AI) in itself leads to a decline in overall economic employment levels. Economists describe this development as a replacement effect (see faculty.georgetown.edu, page 1). Its consequence is technological unemployment.

Compensation effects of digitalization

In addition to the direct labor market effect, digitalization also has indirect effects. They result from the fact that digitalization reduces production costs in many areas. Four effects play an important role here.

 

  • 1 Price effect: If the use of robots, computers and AIs reduces production costs, the market price that consumers have to pay for the product in question generally also decreases. Usually, consumers react by increasing their demand. When companies adapt to this higher demand and increase their production, they need more workers.
  • 2 Income effect: Price reductions for consumer goods also mean that the purchasing power of a given income increases. If this additional purchasing power is spent on consumer goods, this implies a further increase in consumer demand, which then also increases the demand for labor.
  • 3 Competitive effect: Digitization-related price reductions increase the international competitiveness of domestic companies. They can sell more products abroad. The increase in exports represents a rise in demand to which domestic companies respond by expanding their production. This in turn requires additional labor.
  • 4 Investment effect: The digitalization of operational production processes requires the existence of the necessary digital infrastructure. This includes transmission technologies and physical devices, processor and storage technologies, control technologies and information platforms as well as powerful software. All this requires appropriate private and public investment. The resulting higher investment demand ensures a corresponding demand for goods, including the necessary expansion of production.

 

The four effects mentioned above result in a higher demand for labor and can thus (partially or completely) offset the replacement effects of digitalization. They are therefore called compensation effects (see researchgate.net, page 1).

Robots taking over jobs: Replacement or compensation – what predominates?

From a theoretical point of view, it remains open which employment effects outweigh. There are therefore a large number of scenarios which come to very different forecasts for the future effects of digitalization on employment levels.

If only the replacement effects are taken into account, considerable job savings can result: Frey and Osborne published a highly respected study in 2013 in which they calculate the likelihood that certain activities in the US will be computerized in 2035. On the basis of 702 occupations, they estimate that by 2035 “about 47 percent of total US employment is at risk” (see oxfordmartin.ox.ac.uk, page 1).

If, on the other hand, the period under consideration is shorter and the compensation effects are taken into account, small job losses or even increases in employment are expected. Here are two examples relating to Germany:

  • In its calculations, the Boston Consulting Group comes to the conclusion that between 2015 and 2025 around 600,000 jobs will be lost in Germany as a result of the transition to Industry 4.0. In addition, however, around one million new jobs will also be created, so that on balance an increase in jobs of around 400,000 can be expected by 2025 (cf. BCG 2016, pp. 6-7).
  • A simulation calculation by the ‘Institute for Employment Research‘ assumes in a basic calculation that between 2015 and 2025 around 490,000 jobs will be lost in Germany (mainly in the manufacturing sector), but at the same time 430,000 new jobs will be created (mainly in the service sector). The loss of jobs is therefore around 60,000 jobs (cf. Wolter et al. 2015, p. 63).

How could digitalization affect labor markets?

are robots taking over jobs

The forecasts regarding the actual labor market effects of the advancing digitalization are associated with many uncertainties. My personal assessment is as follows:

  • Digitization will basically lead to robots, computers and AIs replacing human labor in the production processes of highly developed industrial economies such as the U.S. and Germany.
  • In the next ten to 15 years, the associated job losses are likely to be moderate. In the short and medium term, this means that the effects of redundancies will be relatively small. They can be offset and even overcompensated by the job-creating effects of digitalization.
  • In the long term, however, there could be considerable job losses – both in manufacturing and in the service sector. This affects above all jobs with low qualification requirements, but also increasingly skilled occupations. This can then no longer be offset by the job-creating effects of digitalization. On balance, a decline in employment can therefore be expected.

Literature

BCG (The Boston Consulting Group) (2016). Inside Ops – Are your Operations ready for a digital Revolution? Boston.

Wolter, Marc I. et al. (2015) „Industrie 4.0 und die Folgen für Arbeitsmarkt und Wirtschaft“. IAB-Forschungsbericht (8). Nürnberg.

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