Saturday, August 06, 2016

Job Displacement in a Globalised World

I know a little economic theory from the three years I spent studying at university, mind you it was some thirty years ago now. Also a little knowledge can be dangerous but I have been pondering how well traditional economic theory stands up in our new globalised, internet world. Let's take for example, job displacement.

Economic theory tends to suggest when old industries are displaced by new companies and technologies, that everyone gains. In essence goods and services get cheaper, new companies provide new employment and living standards rise. However, this makes certain assumptions such as an efficient economy where workers can move and retrain. It also makes no allowance for globalisation.

A new report by Terry Gregory, Anna Salmons and Ulrich Zierahn, entitled Racing With or Against the Machine? suggests things don't work as smoothly in a global world. They looked at the impact of technological change across 238 European regions in the period 1999-2010. They estimate that the displacement of workers by technology in this period was 10m jobs. They estimated this new technology and lower prices would have led to the creation of 9m new jobs which should have worked their way through the economy as the extra wages and profits were spent in the local economy.

However, if you assume all profits flow abroad, the authors estimated net job creation in the local economy would only be 2m new jobs. Profits need to be recycled locally to create opportunities for displaced workers.

My question is what happens when say Google or Facebook hoovers up advertising profits from local newspapers, or AirBnB gains profits from tourists, or Uber takes profits from local taxi journeys. How much of their profits are recycled locally? How much flows back to the parent company in the US for example or is held offshore or paid in dividends to shareholders held by them offshore or spent in other countries?

While economic theory may hold good for the global economy, it seems to me the local jobs displaced are unlikely to be fully replaced by the benefits of new technology, particularly the reinvestment of the profits in the local economy.