Seizing the Opportunity to Drive Inclusive Growth

This essay is included in the new book from the Parliamentary Network on the World Bank and IMF: The Future of Work for the People we Serve. To sign up for the launch of the book as well as a conference on the future of work and inequality, click here!

By Sir Christopher Pissarides, Regius Professor of Economics at the LSE and Co-chair of the Institute for the Future of Wor,k and Anna Thomas, Director of the Institute for the Future of Work

Increasing productivity is a means to an end, not an end in itself. Boosting labour and total factor productivity is essential to building an integrated and competitive economy. But our overarching goal – and driver – must be to meet the needs of society, including needs for social and economic inclusion, the opportunity for employment in good quality jobs across regions and the elimination of poverty.

The current structural transformation – what the World Economic Forum describes as the ‘Fourth Industrial Revolution’ – invites reflection on the nature and context for productivity growth, as well as measurements of it. In doing so, we must look towards our ultimate objectives even where they are obscured or conflict, or appear to conflict, with each other.

One way of doing this – and moving towards an alignment of goals – is to focus in the first instance on allocative efficiency in the context of the economy’s structural transformation: the efficient allocation of productive resources across economic activities, sectors and regions. Allocative efficiency delivers both resilience and a positive response to disruption (‘shock absorption’) across different geographies.

There is increasing consensus that we need to take steps to smooth transition and share benefits – as well as realise the huge potential of the digital transformation, automation and new AI related technologies – if we are to achieve sustainable and inclusive growth. From economic and societal perspectives, the multi-dimensional policy challenge of achieving allocative efficiency is particularly important at this point of structural transformation, which takes place a time of heightened economic anxiety.

Consensus should therefore lead to renewed attention on allocative efficiency. Resource allocation is discussed in this article by reference to three themes: job creation; labour transition; and the role of the public sector.

First, the reallocation of labour across jobs, occupations and sectors towards either higher productivity employment or to growth areas in high demand by society may be more important than any other single factor. So understanding the sources of good job creation – and societal value for these good future jobs – is key. We must shift the debate about the percentage of people engaged in work that is susceptible to a high degree of automation (plausible estimates have now settled on 10 -30 %) to the likely destination of these workers.

The social and economic conditions and policies which enable the creation of good, sustainable jobs for displaced workers include increasing R&D budgets; offering incentives for the dispersion of new technologies; opening up access to finance; higher levels of collaboration between universities and industry throughout the innovation cycle; and promoting competition. These will be required so that workers can move into jobs that are at least as good – and preferably much better – than those which have been disrupted.

Re-valuing and improving the quality and pay of growing share of jobs involving social intelligence, such as care and hospitality work, and the creative industries, will be just as important as the creation of tech-savvy computer science and engineering jobs. We must think about these troubled growth sectors now, whether or not productivity growth is close to zero, based on existing measurements. This is a good example of a short-term conflict between productivity growth and the demands of an aging society.

Second, the degree of support for this transition at an individual, firm and national level will determine the speed of reaction, ease of reallocation and resilience to economic shocks, with its attendant social costs.

Policies to facilitate the process of efficient labour reallocation include the following investments in human capital: nurturing transferable skills through and beyond the school curriculum; flexible and accessible life-long learning programmes developed by employers and social partners motivated to work with government in response to changing demands; active labour market policies targeted at retraining those most vulnerable to displacement; and welfare support aimed at the individual rather than the job, reducing the cost to workers in transition and allowing the portability of benefits. The trial of practical solutions in these areas, grounded in research, should start as soon as possible.

Properly supported, workers should be able to move freely from inefficient to efficient firms within or across sectors. We note that allocative efficiency means the elimination of waste, for example overemployment in unproductive firms, as well as the allocation of factors to their most productive use. This is expected to be the focus in the first report of Denmark’s Disruption Council, due at the end of 2018.

Third, improving the efficiency and governance, as well as financing, for the public sector has potential to increase allocative efficiency. Competition-impeding regulation, high administrative costs and poor governance is likely to reduce the ability and willingness of entrepreneurs and workers to seize opportunities. To varying degrees, these factors will reflect the quality and pay of public sector work too.

We have seen that identifying the primary factors for inclusive and efficient resource allocation takes us – with very little diversion – to ‘the future of work’. This means more than assessing the occupations or tasks that will thrive or diminish or identifying and measuring the essential components of good work, although these are essential building blocks. It means examining the social and economic conditions that enable the creation and access to good work and supporting the process of change by focusing on the human experience. It means building on recent national and OECD work on job quality by examining changes, the distribution of ‘good work’ and the underlying reasons for both. To do this, we must open up and expand the remit of the debate on ‘good work.’ With Brexit closing in, we think it is especially important to identify the pathways to good future work now.

The Future of Work is inextricably connected with the inclusive growth agenda. With good reason, it will bring that agenda to life – and drive it forward.