How to Adjust to the Real Economic Impact of AI (and Labor Market Disruptions in General)

In previous posts we reviewed the impact of globalization and (likely) impact of AI on the economy.

Both these forces will fundamentally reshape local economies through changing which skills are in demand. Globalization has diffuse benefits and concentrated costs because countries optimize around their competitive advantage, harming local economies that rely heavily on particular industries and outputs susceptible to import competition. Similarly, AI (and other technology) will automate various tasks and change existing occupations while creating new ones, harming locations that heavily relied on those existing jobs.

Even today we see the uneven impact of globalization and automation on the US economy. Areas without diversified economies were overly reliant on certain industries like manufacturing and coal production that have been decimated by globalization and technology. Manufacturing jobs have been whittled away by automation and increased trade with China. Likewise, coal production has been hurt by new technology that lowered the cost of producing energy from fracking and shale oil. Areas in the Rust Belt and Appalachia that were overly reliant on these industries have struggled to generate new opportunities for displaced workers.

It is a fool’s errand to try to combat these forces and turn the economy back. Not only does that ignore the huge benefit that globalization and technology impart on the overall economy, but halting the progression of these also creates massive inefficiencies and can only work for a short period of time. Eventually market forces will take over, and the cost of adjustment and harm from it will both be larger than initial investments would have required.

The real public policy problem then is not how to keep dying industries alive, even in cases where a local economy relies on them, especially in the long run. Rather, the central policy question is how to create more dynamic local labor markets that are able to handle these structural changes that will become increasingly more common.

In the aggregate we know that the US is able to handle large shocks as the relative prosperity of the US over time shows, so the crucial balance to keep is in helping people adjust to the new reality while maintaining the overall efficiency of free markets in the long run, which has been a central factor in allowing the US to become the world’s largest economy.

How then can we help people adjust in the easiest manner? There is no single panacea since it will require a host of various policies, some targeted at individuals and other targeted at labor markets.

Focusing on labor markets, there are a host of reforms the US can undertake to ensure people are capable of moving to areas with more opportunity. A big one is occupational licensing reform and getting rid of noncompete agreements to ensure that labor markets are dynamic. Licensing requirements protect incumbents at the expense of overall efficiency and dynamism. Another big policy that would help workers adjust to change is dramatically increasing the supply of affordable housing. A third policy would be wage insurance for workers that ensure their salaries don’t drop if they take a lower paying job right away, and help them adjust to the new reality over a longer period.

Beyond labor market policies though there are ways we can support individual workers by investing in the educational system and providing new, more affordable training opportunities.

The jobs that are expected to grow the fastest and provide middle class careers are different than the jobs of the past in manufacturing and coal. These jobs will be in green energy, technology, and services, especially healthcare. The skill set required to operate these jobs effectively is different than skills in the past, relying more on critical thinking and interpersonal skills.

We need to provide new training opportunities for workers who lose their jobs that can quickly get them into these new opportunities. The answer is not more college degrees, which take too much time and resources and often do not teach the requisite skills effectively. Rather, the answer is to invest in more vocational and shorter form training that can provide the delta skills necessary to transition from a declining occupation to a growing one.

Finally, we are going to need a cultural shift in the way that companies hire and train workers. Today, many companies focus on using college degrees and relevant past experience as a signal of whether a worker can do a job or not. These are noisy signals and are especially bad in an environment of constant change. We need to instead focus on hiring for the right skills, regardless of where they came from, and potential to learn the skills needed through on the job training.

The critical public policy problem over the next decade is going to be dealing with the economic changes brought on by an increasing global world and new technology. We are already aware of the stakes and have some initial tools to help. All it takes is the right political will to start implementing them. We shouldn’t let mistakes in the past repeat themselves now that we know better.