How Can Automation Effect The Economy?

The pandemic has accelerated the slow march towards automation of many roles. Firstly, as social distancing requirements have been implemented and consumer habits have adapted, more roles are finding themselves ripe to be replaced by an automated process. And secondly, the great labour shortages that have arisen all over the world have incentivised firms to invest in new processes to allow them to keep meeting higher demand without seeing costs spiral.

Role of Automation

Automation involves reducing or replacing the human involvement in a process, whether entailing the production of an individual part or component, the upgrading of a production line or the streamlining of entire systems, processes and organisations across a wide variety of sectors from manufacturing to consumers to IT and finance.

Global Surge In Automation:

• Airports have been using mobile robots to spray disinfecting chemicals on their facilities — work that janitors had initially done wearing moon suits and other personal protection equipment.
• The Pennsylvania Turnpike eliminated toll collection by hand and switched to a cashless electronic system.
• Procter & Gamble, maker of detergents, diapers, toilet paper and a cornucopia of other household goods, found that strategically adding robots to its assembly lines made it possible to keep more workers on the job — and produce more goods — while complying with social distancing guidelines.
• Orders for robots in North America, mostly the U.S., surged 20% in the first quarter compared with a year earlier and were up 16% from the same three-month period in 2019, well before the pandemic, according to the Assn. for Advancing Automation. Nearly 10,000 robots were ordered in last year’s fourth quarter, the second-best quarter ever, statistics show.

Effect of Automation

Over the medium term, jobs may be lost – particularly in those sectors where automation is relatively easy or affordable. Manufacturing, retail and logistics jobs may be the most at risk based on a wide-range of research, whilst some roles may be more immune – those that require skills that automated processes can’t do so well: idea generation, problem-solving, or people management. Equally, new technologies may spur the creation of entirely new roles or industries that could employ even more people – possibly in ‘better’ roles than those lost elsewhere. The impact may be more evident in developed markets where wage costs are higher than in the emerging world, at least for now.

Income inequality would surely rise – stoking further political tensions between the haves and the have-nots. Bigger firms may be able to cut costs faster than smaller ones – possibly driving some smaller firms out of business. That greater power for large firms may not be good news for the economy if it leads to higher prices. But if things work out – one could move to a more productive world that could support economic growth in the coming years and beyond. Jobs created may be better quality, higher paid and value-added. There may even be more of them. Workers could be more mobile, able to move between jobs quickly, trained with the adequate skills. Costs could fall sharply for firms as wastage drops out, which may mean a lower cost of service provision and lower inflation in at least some parts of the economy.

On the Bright Side—

Some jobs just can’t be automated- There are a host of roles that either are currently beyond the possibilities of robots or as a society we would prefer not to automate. This includes law enforcement, hairdressers and customer service roles that humans prefer to be done by other humans. In many cases these roles can be automated, but human preference for service or perceived safety is the dominant driver. Roles in healthcare and personal care are less likely to be more automated as a result. One may even see some roles that could theoretically be easily automated – baristas, bar staff and tour guides, for example – survive, or even thrive, as people value human interaction

Roles would become easier and more productive- While some roles won’t necessarily disappear due to automation they could change. Going back to the example of ATMs, where roles changed towards higher value endeavours, one could see a similar phenomenon across a wide range of roles. Workers may work fewer hours, use new processes more effectively and this greater productivity could mean more free time – which may mean a greater demand for the likes of leisure and content.

Economic Impact of Automation-

1. Wages- Over the past few decades, the gap between high income workers and low income workers has widened – and this is something that could easily be made more acute by the impact of automation. If low-skilled workers competing with robots are unable to retrain quickly or effectively, their wage bargaining power will clearly be significantly reduced. On the other hand, if higher skilled roles are helped by automation cutting low quality parts of the job, productivity could increase, and wages may rise with it. The income inequality divide could widen.

2. Prices– Automation is intended to lower costs or at least provide a higher quality good or service without a price rise. The degree by which this impacts inflation will depend on the broader macro environment but it seems likely that more automation will mean lower inflation, all else being equal. Right now, although there are many instances of higher inflation throughout the global economy – varying from higher shipping costs, shortages of key commodities or higher wage costs – over the longer-term disinflationary influences such as competitive pressures and lower costs of production could reassert themselves. In an environment of falling costs due to automation and intense competitive pressures in many industries, firms may be able to maintain or improve margins without raising prices, either at all or by as much as they would otherwise. However, if the macro environment allows, and particularly if one or two large firms dominate, companies may be able to increase prices – either expanding margins or passing on any higher costs. Whilst automation is likely to be disinflationary – it needn’t necessarily be.

3. Politics- In a scenario where jobs are lost and those created either aren’t plentiful enough or are the wrong types of jobs and displaced people can’t easily take them, one could see structural unemployment rise quickly in segments of the economy. This could clearly lead to political impact for some developed economies.