Are Labour Markets Ready for the Digital Transformation?



Alberto Guidi | Italian Institute for International Political Studies

The broader application of ICT and new digital technologies such as data analytics, robotics, artificial intelligence, and the Internet of things is leading to a “digital transformation”. This digitalisation of the economy, also known as the fourth industrial revolution as some experts have labelled it, is transforming business landscapes by redefining the boundaries of production, consumption, and distribution. New processes, products, and techniques have emerged to better address business or customer needs. As a result, technology-driven innovations could increase long-term value and productivity in both manufacturing and services sectors, improving working conditions and quality of life. Nevertheless, the digital transformation also poses critical challenges, especially for employers and employees who need to adjust their work organisation, job allocation, and skills. Hence, to avoid potential disruptive distributional implications, governments ought to equip their citizens with the tools and capacities necessary to participate in this transition. Which countries are best prepared to absorb the adverse effects and reap the benefits of the digital transformation?

The effects of the digital transformation on the labour market

According to the World Economic Forum’s Future of Jobs Report 2020, by 2025, widespread workplace automation linked to technological development will entail a reduction of approximately 85 million jobs, +10 million compared to the amount estimated in a previous edition of the report. At the same time, up to 97 million new roles (-36 million compared to the 2018 report), better able to capture the new division of labour between humans and machines, may be created.

However, at a country level, there are diverging views around the digital revolution’s impact on future job creation/destruction dynamics. For instance, scholars estimate the share of US jobs that are at risk of automation range between 9% and 47%. Meanwhile, in similar studies applied to EU members states the gap is even wider:between 7% and 60%. In addition, the extent to which activities can be automated is also widely debated. Current estimates show that only between 1% and 9% of jobs could be automated by demonstrated technologies.

Ample evidence can instead be found for the progressive change in the quality of labour demanded of jobs. Employment is shifting away from tasks with a higher routine content. By 2025, repetitive and mundane activities will decline from 15.4% of the workforce to 9%. In light of the higher routine intensity of lower-skilled jobs, this skilled-biased technological change may have important distributional implications, resulting in growing polarisation of the labour market. Almost half of all the new jobs created by the digital transformation will require high skills. Consequently, about 40% of lower-educated workers will face the risk of having their job automated, compared to the 5% of workers with a tertiary degree facing the same threat.

The wider use of technology will lead to a higher request for digital, technology-related skills and non-cognitive ones such as communication, creativity, and critical thinking. Demand for roles such as robotics engineers, artificial intelligent specialists, and digital marketing specialists will gradually increase at the expense of jobs such as assembly and factory workers, executive secretaries, accountants, and auditors.

Which country is better prepared?

Technological change and digitalisation reinforce the importance of skills as a geopolitical tool, too. Therefore, skills gaps in the local labour market and the inability to attract the right talent represent some of the main barriers to the adoption of new technologies. Therefore, countries whose educational and labour systems can effectively face these issues could reap the most benefits from the digital transformation while reducing its adverse effects.

In this context, according to the World Economic Forum Global Competitiveness Index, the United States, following the United Arab Emirates and Switzerland, has the highest capacity to attract and retain talent. The first EU member state within this ranking, Germany, is ten positions below.

The EU has overtaken the United States as a destination for international students, with 45% of all international students versus the US’ 25%; however, most do not stay in Europe after graduation. Consequently, it is estimated that only three out of ten highly-educated, third-country migrants residing in OECD countries live in the EU, compared to the six out of then migrant who reside in North America. China only ranks 34th, while it is the largest global source of international students —who make up about 10% of overall international students worldwide.

The US also leads the way in the “ease of finding skilled employees” index, outperforming Germany and China by respectively 19 and 40 positions.

Two additional crucial factors in the path towards a smooth digital transition are the digital literacy of the population and the number of STEM students. The former is increasingly necessary for workers to take part in lifelong learning programmes to update their skills. The latter, instead, is of the utmost importance since tomorrow’s jobs will strongly demand science, technology, engineering, and mathematics skills. Northern European countries and North America have the highest degree of digital literacy —measured on the basis, of sufficient computer skills, basic coding, and digital reading. By contrast the eastern part of the world boasts the highest share of STEM students, with Russia, India, China, and Singapore all reporting above 30%.

On the one hand, the wealthiest countries seem to be better prepared to absorb the impact of digitalisation on the labour market. On the other hand, however, it is also true that the higher the labour costs, the more likely for activities to be automated. Therefore, these countries will probably have to face more substantial automation processes. Its effects will not be dramatic in the short term, as in a fiscal or financial crisis. In fact, there is no compelling evidence that employment levels are declining. Nonetheless, over the medium term, the changes due to digitalisation will affect some of the fundamental building blocks of welfare states, ultimately requiring new labour market arrangements.

Alberto Guidi is an ISPI Research Assistant at the Centre on Business Scenarios.

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