Innovation,unemployment and subjective well-being

These days, everybody is talking about the losers of globalization and how they made Trump and Brexit happen. People in industrialized countries lose their jobs due to offshoring and international competition, which leads them to vote for right-wing populists, so the common narrative goes. That might not be the full story though. As the Washington Post argues,  American manufacturing is actually doing quite well. Its output is constantly rising for the last three and a half decades (arguably with a slowdown since 2009). In the same period, however, the number of jobs in the sector decreased by 7 million. This is possible because of massive productivity increases , which make many jobs obsolete. So the real culprit might be innovation rather than globalization.

In the newest issue of the American Economic Review, Philippe Aghion, Ufuk Akcigit, Angus Deaton (Noble prize winner in economics in 2015) and Alexandra Roulet published a paper (ungated version) exploring the relationship between innovation-led growth and subjective well-being. First, in order to fix ideas, they develop a version of the hugely influential New Schumpeterian Growth Models. In this class of models, the economy undergoes constant episodes of ‘creative destruction’—a term coined by Austrian economist Joseph Schumpeter. Existing firms in an industry are challenged by new entrants with superior technologies. Since entrants are more productive they take over the market and drive incumbents out of business. This is good for society in the long-run because increased productivity spurs economic growth. But it comes at the cost of higher turnover rates, as some firms are forced to exit the market.

Creative destruction affects workers well-being (the guys that will eventually go to the ballot boxes) in two ways. If an incumbent goes out of business, its current workforce will suddenly become unemployed, which is obviously discomforting. At the same time, entrants  will hire new people and because they are more productive than previous companies they are also able to pay their people hire wages. This mechanism increases subjective well-being in the long-run. In the second part of the paper, the authors go out to test these model implications empirically and reach the following conclusion:

In this paper we have analyzed the relationship between turnover-driven growth and SWB [subjective well-being], using cross-sectional MSA [metropolitan statistical  area] level US data. We have first built a Schumpeterian model of growth and  unemployment to make predictions on how job and firm turnover affect  well-being under various circumstances. Our main empirical findings are consistent  with the theory: namely: (i) the effect of creative destruction on well-being is  unambiguously positive if we control for unemployment, less so if we do not; (ii) job  creation has a positive and job destruction has a negative impact on well-being; (iii) job destruction has a less negative impact in MSA within states with more generous unemployment insurance policies; and (iv) job creation has a more positive effect on individuals that are more forward-looking.

I take a few issues with the paper though. The model assumes that the level of employment as well as the labor share (fraction of total industry output allocated to wages) is similar before and after creative destruction. Thus, there is no job rationalization or migration to low-wage sectors. In addition, the model doesn’t consider education or human capital such that job creation in newly emerging sectors is not impeded by unmatched skill requirements. Lastly, by controlling for unemployment in their regressions they are conditioning on an intermediate outcome variable, which creates estimation bias if unemployment is correlated with unobservables. So their empirics are a bit shaky.

Nevertheless, as the authors acknowledge, “[t]his exercise should be seen as a first step” towards understanding the important relationship between innovation, inequality and well-being. Although their model is very simplified, it still highlights an often overlooked point by people who fear robots taking over our jobs in the near future. Namely, that although adjustment is tough in the short-run, humans are very good at acquiring new skills to make a living. In fact, they have proven so for centuries. Or where do you see all the unemployed pinboys? It’s not clear to me why this time we should be suddenly confronted with the limits of our mental capacity and should never find worthwhile occupations again. And the upsides to innovation and productivity growth are of course tremendous. Just imagine how shitty of a job it must have been to set up fallen bowling pins all night while semi-drunk people were throwing 7 kg metal balls after you…

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