How to Cope with a Changing Economy


Carlotta de Franceschi proposes "a new social contract" as new technologies change the way we work.



In the late sixties novel “Do androids dream of electric sheep?” the differences between humans and robots are so blurred that you could tell them apart only through an “empathy test”. The differences are so minor that the protagonist, a bounty hunter going after fugitive replicants, realises he is married to a replicant himself.

Fifty years later, reality is rapidly catching up with fiction. Recently Google AlphaZero, a game-playing Artificial Intelligence (“AI”), trained itself to become the best chess player in the world, beating its sibling and human-trained algorithm Stockfish. It had taken countless human trainers and years of development to perfect Stockfish; AlphaZero beat it after less than a day of self-learning. Former world chess champion Garry Kasparov commented, “We have always assumed that chess required too much empirical knowledge for a machine to play so well from scratch, with no human knowledge added at all.”

Chess players are not the only ones threatened: artificial intelligence, machine learning, robotics and blockchain are rapidly taking over activities formerly done by lawyers, doctors, accountants, research and data analysts let alone factory workers, truck and car drivers, receptionists and miners. Any job that is either repetitive, routine or highly analytical and expensive enough to justify an investment in scalable automation is at risk.

According to a McKinsey study, “Jobs Lost, Jobs Gained, by 2030 automation will replace between 9% and 26% of all working hours and 14% of the workforce worldwide will have to change job and learn new skills. McKinsey also notes automation will hit developed countries harder than developing countries and that 10% of employment will be in roles which don’t exist yet.

According to Brookings, “The future American workforce will have a lot of jobs to fill, particularly in infrastructure, between now and 2030, US employment turnover will be at 11% per year, with a 25% peak for certain positions. The least paid and lowest skilled jobs will be the most affected.

On the other side of the Atlantic, according to “Skills Forecast: key EU trends to 2030, the situation will be similar: 20% of the new jobs will require high skills and the most affected workers across the continent will be the least qualified ones, especially in white collar jobs. Most of the jobs will require a medium level of education, with about 43% of jobs requiring a higher level.

In 2050 the situation will be even bleaker: in the Bertelsmann Stiftung report, “2050: Future of Work- Findings of an International Delphi-Study of The Millennium Project, almost unanimously and independently from their age or region, experts forecast a global unemployment level of 24%. The driving forces behind rising unemployment levels according to the experts are robotics, technological convergence, synergies and artificial intelligence on one side, and the inability of the training and educational system to cope with technological change on the other. According to the same report, between now and 2050 we can expect a decreasing number of workers in standard contracts and a migration toward freelance and self-employed positions. The same view is shared by McKinsey in “Skill Shift Automation and The Future of The Workforce. Organizations will be flatter with people moving laterally rather than vertically and with companies oriented toward hiring contractors rather permanent employees for specific tasks.

The new industrial revolution differs from previous ones in its pace and reach: by 2050 people will have to be prepared to change job often, constantly learn new skills, have gaps in their employment, work on non-standard contracts and, in some cases, leave the job market for good.

The biggest implication of this picture is sociological: since the beginning of civilization, people have built their identity around their profession which often defined their position in society; providing income, status, network and often an important form of psychological reward and a way to express themselves. The unfolding future then commands several key questions: first, how can we cope with a rapidly changing identity moving among different careers in one’s lifetime? What will be the alternative provider to one’s identity, if his / her job will no longer do it? Second, now that the entire concept of “work” is being revisited, does it still make sense to consider “work” as a founding pillar of our society? How can we still ensure social mobility? Should “work” be somehow decoupled from “income”? And how? Third, if robots are competing with us for jobs, are robots supposed to have comparable dignity (and rights) in society? How should society review its values, organization and rewards?

Another huge implication is social. These challenges are unprecedented and are threatening the smooth functioning of open societies: how should the new social contract be drafted in order to avoid major backlash and a social unrest that could threaten the stability of societies and eventually democracy itself?

Most of the debate regarding the “new social contract” still assumes that one’s dignity is linked to having a job and that basic rights should be assigned to anyone working. Setting aside the fact politicians, investors and influencers disagree on the identification of who is covered by “anyone working”, this assumption alone poses a significant challenge to policy makers. Academics and experts are struggling to find the right formula that would allow Countries to fund high quality education, continuous education and training, benefits for longer time periods to support employment gaps and for a broader population than it has traditionally been necessary to support.

As for me, I believe three main lines are crucial: capital, education and welfare.

Capital

At the core of the 21st century ideologies there was the dichotomy between capital and work. This dichotomy could potentially make sense in a highly structured labour market organized into standard contracts, negotiated between unions and corporate representatives. Now that the labour market is becoming more fluid and that non-standard contracts are increasingly relevant, policymakers should rethink employment rules and benefits.

First of all, equity based compensations should be incentivized both at corporate and individual level. This is the most effective way to close the salary gap within an organization, align incentives and provide significant upside to employees across the organization. A study performed by France Digital observes that in Venture Capital backed companies which widely use equity-linked compensation, the salary gap is lower than in traditional companies.

Second, income from self-employment should be fiscally favoured compared to regular employment income, as many people will be self-employed or work as contractors and their earnings will be more variable and less predictable. For the same reason, self-employed private pension contributions should be tax deductible.

Finally, as more people will be drawn to entrepreneurship, an entrepreneur’s investment in a start-up should be exempt by capital gains and on tax on dividends for the first ten years. Start-up finance, from angel to VC investing, should be treated differently and more favourably than regular investments and savings.

Education

After the Global Financial Crisis, most economies in Europe reacted by taking austerity measures and cut investments in education and research. These cuts sounded politically less impactful than cuts in pensions and healthcare but have serious and far reaching effects in the long term. Governments should be thoughtful about investments (or lack thereof) in human capital. The Fourth Industrial Revolution will profoundly change the shape of economies and the global map of geopolitical weights: Governments should not only worry about citizens but about their country as a whole when considering the winners and losers of this revolution and who is at risk of being left behind.

As a matter of fact, countries should work hard to foster a strong and qualified education system from elementary school to university. School and universities should be designed around students, not professors. Vocational training should be strengthened across the Western World and a cumulative allowance should be given to each citizen as a percentage of their income so it can be invested at any given time in training, retraining and upskilling. To quote the IMF, “Future of Work: Measurement and Policy Challenges, governments should “prepare workers for lifelong learning and adaptability to technological change and ensure long-term skill matching”.

Finally, broad access to high quality digital infrastructure is key to promote technological adoption and diffusion and building such infrastructure should be a top priority.

Welfare

Regarding welfare, the three pillars should be unemployment insurance, healthcare and retirement pensions.

On unemployment insurance, there’s a lot of debate around the world on how to compensate people who remain out of the job market for significant period of times or for good. In the Brookings article “Social insurance in the time of robots” Gonzalez-Miranda and Izvorky underline; “Social insurance systems financed by payroll taxes created for times of stable employment with one formal employer and a substantial surplus of contributors over beneficiaries have become fiscally and socially unsustainable. Often, their rules leave the workers of the new economy without even a basic layer of social protection.” Then – moving from the US system – they make three policy proposals: first, to delink social insurance from employment contracts and change the financing of public schemes from general government revenues. Second, for retirement pensions, fold the pay-as-you-go, (PAYGO) defined-benefit systems into a fully-funded, defined-contribution scheme for all who make contributions to the scheme. Third, set up a complementary pillar of privately-owned accounts for unemployment, health insurance, and old-age pensions, funded by tax-free private contributions.

Given that freedom of people and capital is a pillar of the European Union, fostering a single system for unemployment insurance and retirement that takes into account the contribution periods spent in each country should be a priority. There’s still a huge divide in Europe among elderly pension systems for example. A pay-as-you-go system creates a significant burden on current generations and can widen further the current intergenerational divide. Favouring and fostering a private and fully funded pension system should be a priority across every country in Europe. Private pensions should make the bulk of a retiree cheque. Furthermore, long term disability and other forms of insurance that are embedded in the social contract for standard workers should be delinked from the job itself and be provided universally to everyone also in non-standard contracts or self-employment.

Integration in Europe and international cooperation among countries must be strengthened not only to guarantee the international transfer of pension rights (in particular bilateral agreements regarding pension rights should be widened and standardized), but also to avoid tax competition among countries.

Finally, there’s a lot of debate on both sides of the Atlantic, on a universal basic income, or “UBI”. UBI represents a major flip of several key principles governing tax-benefit policies and would replace any other benefit and tax deduction, including early retirement and unemployment insurance, and be universally and equally distributed, regardless of prior income or other individual situations (e.g. number of dependants, family income or assets). Current social transfer mechanisms would be replaced with an unconditional, individual and flat rate benefit. Speaking about winners and losers, according to Browne and Immervoll (2017), the biggest hit would be absorbed by the early retirees (55-64 years old)

The main argument in favour of UBI is that the rapid evolution of the job market is not only blurring the lines between traditional employment, self-employment and new types of atypical employment but also making the traditional benefit system obsolete. According to the paper “Mechanics of replacing benefit systems with a basic income: Comparative results from a microsimulation approach”, Journal of Economic Inequality (2017), even now that a large majority of workers are still in traditional contracts, in around half of the OECD countries, fewer than 50% active job seekers receive unemployment support.

The most prominent criticism of UBI includes both its cost and effectiveness. The Centre for Economic Policy Research in “The changing nature of work” analyses the potential fiscal impact of this measure on 4 different European countries and claims that, keeping cash transfers at the same level, UBI would cost roughly 14% of GDP in Finland, 10% in France, 9% in UK and 3% in Italy.

According to Browne and Immervoll (2017), in Finland and Italy the additional revenues from making UBI taxable and abolishing tax-free allowances would be more than sufficient to cover the extra costs of UBI running at General Minimum Income (“GMI”) levels (in Italy, this would occur because GMI - according to the same authors - is set below the poverty line), while a budget-neutral UBI reform in the UK would require a sizeable amount of UBI below GMI levels.

Another key challenge in designing a “UBI” that works is linking it to proper incentives and monitoring how fair it is. Usually, in its different articulations, UBI is linked to work, training or treatment and make the receiver extremely accountable.

The complexity of UBI is also it’s trick: regardless of its design and social implications, the slogan itself could easily serve the purpose of a sweet panacea for populistic politicians building dangerous electoral campaigns.

In my opinion though, the biggest question regarding the fourth industrial revolution and the future of work goes straight to the heart of politics. If we believe that Plato in “The Republic” was right in that only a Philosopher is the best suited to rule, as he knows The Good and will not be corrupted by the pursuit of power and material good, then we can easily see how Artificial Intelligence could potentially cause the biggest job replacement of all and take over political jobs. We’ll then have a machine or its programmers ruling our society and designing the best policies so people, employed or not, can feel fulfilled.

Another question (or fear) comes pretty naturally at this point: in the world of big data, where the holders of the information know everything about any individual and could easily monitor, control and even manipulate everybody, how long will it take before Plato’s Republic turns into an Orwellian 1984?

You know what dear reader? It may already be happening…and not that far from here.


 

About the author

Carlotta de Franceschi is founder and President of Italian think tank The Action Institute.



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