Richard Freeman
Richard B. Freeman, Herbert Ascherman Professor of Economics at Harvard University and Co-Director of the Labor and Worklife Program at Harvard Law School, joins Social Europe Editor-in-Chief Henning Meyer to discuss the impact of technological changes on the world of work. Will machines substitute old jobs and create new ones? Or will machines just take over and leave large groups of people unemployed and unemployable? These were some of the crucial questions about the future of work that they discussed.
Let’s start with a general question. What do you think is the impact of technological changes on the world of work?
Well, I think that the development of artificial intelligence, and more flexible robots, is indeed creating machines that are better substitutes for some of the more skilled things that humans have done.
Traditionally machines could do good things, sort of muscle activities. They can now do things in more subtle activities, including out-thinking us at various times. That is clearly changing the world of work.
In the discussion about substitution of jobs, the creation of new jobs, and augmentation of jobs in the sense that the profile of jobs will change completely, where do you stand?
Are you one of the pessimists who think that there is an overwhelming case for the likelihood of substitution more than job creation and augmentation? Or do you think there will be a balance, as in previous technical jumps forward?
Well, I would consider myself an optimist, but it’s an optimist in the sense that if we manage this process well it should improve living standards for people and create possibilities for greater leisure, if we want it.
The traditional optimist view is humans would always be able to get better jobs, because the machines were substituting for brawn.
If they substitute for brains it doesn’t mean we necessarily lose work, but it does mean that there’s going to be a rebound on the wages in many occupations that people get.
If there’s a machine that can do an accounting job as well as an accountant the accountant’s wage is going to be less than, or equal to, that of the machine.
I think the key thing is whether we citizens of the different countries own the machines, and have a stake in the income that’s going to flow from our substitutes, or not.
If we have a good share of the income that will come from these machines then I think we’re all going to be better off. If we don’t it’s not going to be just that people will lack jobs, but people’s incomes just simply will stagnate or go down, as the machines provide low-cost substitutes for the best things we can do.
We will come to the “citizens’ share” in a moment, but let’s stay with the labour market, or the likely shape of the future labour market, for a moment.
Do you agree with other people we’ve talked to, and also that seems to be the evidence that I found in my own work on the subject, that the shape of the labour market at least tends to be going towards a polarisation.
So, if you don’t change the ownership share of this capital, or these robots, and these other things, you will see a polarisation in the sense that a few people will reap the digitalisation dividend and move to the top, but a lot of what is now perceived as middle class jobs is prone to substitutions, and might be transformed into rather low-skilled, lower paying, service sector jobs, a trend that we’ve seen also in recent years.
Would you broadly agree with this characterisation, or do you see it differently?
No, I do agree with that characterisation. I can imagine there are very sophisticated machines, and our job is perhaps to make sure the machines are clean and they’re plugged into the electricity.
You agree with this trend? Basically we are potentially faced with the hollowing out of what used to be perceived as middle class jobs?
Well, we see that occurring already. Certainly the robotics, and other more sophisticated machines, many are still in the pipeline. Yes, I think this is not a – what’s the right word? – not a pessimistic view or optimistic view but a realistic view.
If we move on to the potential remedies, you have suggested a “citizen share”. Can you just briefly explain what you mean by this?
Well, if we have machines that are very good substitutes for us, and they’re increasing productivity around the world, which these machines are and will keep doing, then the key issue is not what the machine does for the world of work, but who owns the machines and gets the benefits of the improved technology.
My solution, I think the only reasonable solution, particularly in a capitalist system, is that ownership must be extended to more and more people.
We do not want, certainly, a world in which a small number of medieval style lords own all the capital, and the rest of us are serfs working on their plantations or whatever.
That would be capital ownership by the workers, or could it be also public ownership by governments and state institutions?
I am actually in favour of ownership by workers. Maybe this is a very American view, but I’m suspicious of governments owning. We’ve had experience with governments trying to own things, under the Communists and so on, and that has not worked out well. It is better that it be decentralised ownership. Basic economics is also very favourable to more decentralised ownership.
Big government owns something, makes a mistake, it can be terrible. I own something, and I make a mistake, it may be bad for me but it doesn’t harm other people who are making better ownership decisions. So I’m for people owning, not for the state owning.
Obviously there are functions for the state – public parks, infrastructure investments that states should do – but the idea that government would step in, and either own things or redistribute income through huge taxes, strikes me as very dangerous.
What I’m referring to is a discussion that we actually had on Social Europe when we looked at inequality.
There was a proposal, for instance, that if you take as a given the structural primary distribution that Thomas Piketty described, even with very, very high marginal tax rates you will not be able to solve the distributional puzzle.
What was proposed by an Italian economist, who teaches in Berlin, was what he called “Public Capital in the 21st century”. Basically this is a sovereign wealth fund that takes capital positions in a diversified portfolio, and basically reaps the return on this capital.
It’s not the idea that we have old-fashioned statism, in the sense that you own and run a business as yourself, but it’s basically the state being an investor and having the return on this capital re-socialised.
There’s some sense to that, and probably sovereign wealth funds should be part of the solution, because we currently have pension funds. They’re not state, but they are certainly state privileged through tax benefits you have in pension monies, and there are many of them.
I suppose I’m preferable to (the notion), if we’re going to have large pension funds, which I assume that will be part of a solution, or sovereign funds, there should be many of those funds rather than a single such fund.
The Norwegians have been remarkably successful, I think, with their sovereign wealth fund. The State of Alaska has done reasonably well, just declaring dividends for paying money to every citizen.
There are successes, but there are also these great dangers. When you get politicians involved in huge sums of money, without enough controls, the potential for chicanery, for bad behaviour, for taking care of my family and friends, etc., seems to me high.
If this Italian economist working in Berlin proposed sovereign wealth funds that are broken up into competitive funds, that seems to me a correct and probably a necessary part of the solution.
What that doesn’t do though is give incentives to the people at a company to work harder or better. To a person at a company it’s still some outside investor who owns the firm, and, “I’m working for the outside investor.”
The virtue of having workers have a stake in their own company is, I think, that it incentivises a greater productivity and effort as well.
So I think that I’m in favour of a mixture of these schemes.
So, on the public side it really depends on how this is set up, and how the checks and balances work. At the same time, if you have individual shares you create an additional incentive in the workplace. Basically a good solution could be a well-balanced mixture of both?
Yes. I think if you look at the actual numbers, certainly for the US, I know it would have to be a mixture.
Although, I’m thinking not of government sovereign wealth funds, because we’ve got the tax privileged pension funds, which are very similar. They own large amounts of companies, and they’ve worked out reasonably well, I think.
If we move on just a bit, from the labour market towards the general shape of the economy, early indications might suggest we are seeing a big diversification in how the economy works.
For instance, the traditional economic distinction between leisure and work seems to be breaking down with the advent of new business models, such as peer to peer and so on and so forth.
As a result of the discussions we’ve had on this issue so far it seems that the future economy might look at bit like this:
You will have a traditional work sector, propped up in one way or the other, but because of the substitution effect that we have already talked about there might be less work.
We’re basically back to a Keynesian situation, where we will have to think about the re-allocation of the remaining paid work, and that might lead to fewer hours.
Then we will have a new sector, the sort of peer economy, or an economy where basically value is created without actually money changing hands. That will be in the middle somewhere.
Then at the same time, in order to maintain domestic demand, and, as you said, address distribution questions, we will have to make sure that capital ownership is looked at in different ways as well.
What do you make of this kind of interplay between different aspects of the new economy?
Well, there’s one part of this interplay in the new economy that I think is very bad and that you’ve left out in your discussion of it, and this is this zero time work contracts, which is remarkable, turning workers into the most variable, uncertain, and risky positions.
Obviously if they all own large shares and have income they can decide, “When you call me up I can show up or I say, ‘No, I’m going to go to the beach today’, or, ‘I’m going to the park.’”
Most of these workers are at risk. They need the money, and they have absolutely no certainty, and the employer is clearly not going to be investing in their skills. I think one has to monitor, probably with strong labour laws or employment laws, how these new forms of work arrangements are undertaken.
It’s so easy if you’re a freelance worker, even when you have a contract to produce some work for your employer, to say, “Oh, I really don’t like this. I will give you £1,000 or €1,000 instead of the 1,500 I told you.”
We have to make sure the contracts in these new more flexible, open exchanges are obeyed – the law makes sure people carry out their contractual agreements.
Within what we now call the traditional labour market there are significant changes as a result of technology as well. You basically say we will have to regulate that in a new way.
Also, for instance, these market making platforms need to be regulated so that labour legislation, like minimum wages, safety and health regulations, are actually enforced.
That might probably also lead to rethinking completely the role of trade unions, because they will have to find new ways to organise these people.
Yes. Well, one of the things I think everybody, including the many people inside the trade unions, understands is that they really have to change dramatically. Unfortunately it’s an old bureaucratic institution that has big trouble in making tremendous changes.
I’ve thought a lot about this and suggested various ways to the unions that they could change. Some of them are, but it’s just a very hard process for the unions to shift to a new world.
There is probably very little alternative for them?
Well, there is an incentive, if they expect to have members in the future and become an important force. In the US they are a very marginal force, because their membership has declined, they are unable to exploit or make use of the new technologies as well as firms do. It’s a real problem in our country.
I think in Britain and some of the European countries they have done a bit better, but I think everybody, all the unions face this giant challenge.
You cannot be an organisation with, let’s say, a tradition, and a history, and a mode of operating that worked 100 years ago, or 70 years ago, in a modern world, with the internet and with these machines that are going to be good substitutes for workers. You have to adopt new strategies, etc.
Younger union people understand this I think better than some of the older leaders, who have built up their skills and their knowledge of the world, and their connections, from a different universe.
So we’re having the dilemma that, given the revolutions on the labour market, we probably need unions more than ever before, but at the same time they’re struggling tremendously to adapt to the new circumstances?
Yes, and I think how we end up in the end will depend, in part, on whether unions are able to reinvent themselves, or rejuvenate their modes of operating, and join the modern world. Instead of, I would say, living in a past that is the past.
Richard, towards the end I would like to put this very easy question to you: if you were a policymaker today what would your top three priorities be? What kind of policy change would you enact in order to prepare for the challenges ahead?
Oh, this sounds like one of the questions they ask Mr Trump, “Here’s an easy one” but the first policy…
I wouldn’t want to ask him this question though…
Who knows what he would say?
I think the first policy change that I strongly favour, and I’ve done some serious policy analysis of, is encouraging firms and workers to have a greater ownership stake going to workers, be that profit sharing inside companies, or I would prefer some stock ownership inside companies. That’s number one.
Number two, and this gets to your sovereign wealth fund kind of phenomenon, but I’m thinking about it as pension funds. There has been very little movement here, but there’s got to be a way in which these pension funds and sovereign wealth funds, that the people, the voters or the members of the fund, have a bigger say in how the fund is invested. It cannot rely on the Wall Street experts to do that. That helped create the 2007/2008 disaster. You need individuals, the real owners of the money, to have a bigger stake, somehow democratising the ownership or the control of these funds.
Then the third policy I think is to do some strengthening of traditional labour law things, so we do not have more and more workers in your polarised world becoming completely variable factors, their employment and wages dependent upon employers.
Obviously many employers will treat workers well, and pay them well, but there’s always going to be a fringe that will try to rip off the workers, and if they make more money that fringe will grow.
So I think we do need some labour laws restricting the zero time contract type phenomenon, and making sure that when there is a contract it is in fact obeyed by the employer.
Thank you very much, Richard, for taking the time to talk with me today. I’ve got a hunch that this topic is not going to go away any time soon, so this might only be the start of a longer process.
Oh, I hope it is, because otherwise we’re headed in this direction of a small elite of super-wealthy people controlling the capital, ultimately, in the US at least, controlling the politics, and that’s going to end in some sort of a very bad situation for everybody.
Well, let’s hope this dystopia doesn’t come about. Thank you very much again.
Thank you.
This contribution is part of our project on the future of work and the digital revolution.
Richard Freeman is the Herbert Ascherman Professor of Economics at Harvard University and Co-Director of the Labor and Worklife Program at Harvard Law School.