What does disruption look like within the labor market?

Disruption within the labor market is something to be expected but what happens when disruption comes from a temporary source rather than a natural progression or shift in society? One Nobel Laureate examines how the labor market has been impacted by COVID-19 and which changes may be here to stay.

It’s no secret that the COVID-19 pandemic impacted nearly every aspect of our daily lives. Schools and workplaces shifted from the physical to the virtual. An enormous strain was put on the frontline workers in health care, at grocery stores, in pharmacies. The travel industry was left in limbo. But there is one overarching, unifying element in all these varied examples: people, and more specifically, people and their jobs.

As a macroeconomist, Nobel Laureate Sir Christopher Pissarides has long been fascinated by the interactions that take place within the labor market and was not only prepared, but eager, to explore the radically new form of disruption COVID-19 brought with it.

“Disruption in labor markets is referring to new technologies, mainly automation, which might take the form of robots in manufacturing, artificial intelligence in the office, computerization,” explains Pissarides. “Digital technologies are disrupting labor markets and the way they work because they require different skills.”

This type of disruption is, of course, natural. Because of advancement in technology, new sectors emerge, and those sectors create jobs, while rendering other jobs in other sectors less useful or even obsolete. This is what happened during the first industrial revolution and has also led economists and other market experts to refer to age of automation as the fourth industrial revolution. The pandemic, however, brought a very new, not so normal form of disruption.

“What COVID has done to our labor markets is to introduce a cost of being in the proximity of other people,” says Pissarides. “The cost is a health risk, but if you look at it in a more abstract way, as an economist, it could be any cost. If I were advising a student how to model COVID, I would say a simple way of doing it is to assume that every time you come into contact with a person, you put down a 10 euro note, that's the cost. That's the risk of catching the disease.”

The implication with the model Pissarides is proposing is that we’re trying to save on cost, and to save on costs, we turn to technology or seek out new ways to conduct our old behavior in a way that reduces the now costly activity of being in close proximity with other people.

“The disruption in labor markets increases because it's pushing the same direction that technology was pushing before and automation accelerates,” he continues. “You hear big companies saying we were planning to automate such and such a process in the next 10 years, now we're going to do it in the next five years. Or we were planning to introduce this technology a year from now but because of COVID, we've already introduced it. And that's what we mean when we say there is an acceleration of disruption or increasing disruption.”

With the shift and acceleration in automation and technology adoption, retraining the workforce is something many companies must also consider. That word ‘retraining’ is one Pissarides himself has used many times when discussing the future of work. The burden of retraining however, he says, should not fall solely to the workers.

“It's in the nature of economic development that transitions of workers has taken place all the time. Retraining is nothing new,” he says. “In recent history, the biggest transitions of all took place in China. In 1980, about 65 to 70 percent of the labor force was doing agricultural work. Now, maybe 10 percent is doing that agricultural work. That half the labor force had to retrain, because if you know how to cultivate the land, it doesn't mean that you know how to work in an urban environment, in factories, or in the service sector. What's different this time, I think, is that the new skills you have to learn are a long way from what you know now.”

He uses the manufacturing sector and when electricity was introduced as an example. Before electricity factories ran on steam power, manual labor, or a combination of both. With the introduction of electricity, steam was replaced making the process faster and cleaner. The workers had to learn how to use electricity, how to manage the cables, in a similar fashion as they had to learn to use steam engines.

“Now, however, you are told there is this new thing, digital technology called AI, and you have to program in a certain way. And it's very different from what you were doing before, and therefore it's a much bigger challenge,” says Pissarides.

The historical examples of industries adopting automation have one major difference than what we are experiencing today. Whereas in the past, it was about evolving and adapting to changing times, what happens when disruption to the labor market is temporary in nature, brought on by a pandemic or other type of crisis or crash that will enter, eventually, a recovery stage. Are the changes brought on by COVID-19 here to stay? According to Pissarides, it’s a question we may not have the full answer to, yet.

“During the pandemic, the function of labor markets has changed completely because most of the jobs that we did involve interaction with other human beings and the cost of that interaction was massive to society as a whole, and therefore we took many measures to minimize that,” he says. “Think of provision of food. Restaurants closed down, supermarkets practically closed down, our streets are full of vans and motorcycles delivering food and there is a lot more cooking at home.”

“The interesting thing is what happens after the pandemic, because during the pandemic, it's fairly obvious where the changes are going to take place. After, I think, there will be changes that last into the long term for two reasons. One is that we developed new technologies over the last two years and once the new technology is there, you don't throw it away. The best example we've seen in business meetings, maybe giving seminars, you know, it was all done in person before. You would get into some mode of transportation, maybe a flight, maybe train, meet someone, discuss. Now you do it over the internet.”

The second reason that Pissarides believes there will be long term changes is perhaps slightly less noticeable as it’s happening than adopting new technologies but impactful, nonetheless. Many people don’t want to be the first person to try something new or position themselves as a type of guinea pig, he says. People are generally creatures of habit. When something like a pandemic forces us to change behavior, however, new and potentially better habits are given the space to emerge. A good example of this is working from home.

“Say you had a job in an office, doing a lot of your work while sitting at your desk, looking at the screen and doing your work online. If you went to your boss and asked to work from home one day a week, I'm sure your boss would have felt like you weren’t committed to the job,” says Pissarides. “Now, these people are the ones that were in the most advantageous position during COVID times because they could stay home and do their work. The expectation now is that a lot of work, something like 20 percent of work, will remain in the home or done in a remote way just because we got used to working from home.”

In Pissarides’ expert opinion automation is, overall, a positive thing but it must go hand in hand with societal shifts to optimize the transition and be supported by public policy as well.

“The upside is that you can get machines to do the boring jobs and then human beings can do other more interesting things, including taking more time off. I'm a big fan of time off,” he says. “And the downside is that it's very difficult to see a more equitable distribution of the benefits from automation. Automation has this tendency to benefit the wealthier in society because the capital owners are the ones whose jobs are complemented by machines. So whatever inequalities we've had in the past are exacerbated and that's why people are worried about automation. But I think the benefits of automation would be such that governments could use some of those benefits to help the transition and to help improve the quality of jobs.”