“If a man takes no thought about what is distant, he will find sorrow near at hand” — Confucius

The world is changing. The very essence of work is changing. As Bermuda’s job market continues to stagnate it’s important we briefly delve into the changing nature of technological innovation and its implications for the future employment and society more broadly on the Island.

David Ricardo in his seminal work The Principals of Political Economy and Taxation, in 1821, suggested that the substitution of workers by machines may “render the population redundant.”

John Maynard Keynes echoed this sentiment by predicting widespread technological unemployment as a result of mankind failing to find sufficient new uses for its labour as machines replaced workers in old occupations and fading industries.

The digital age may cause more upheaval than previous technological shifts because the pace of change is faster than ever and it is fundamentally changing the way we all live and work. The automation of routine tasks is not the only skill set at risk. Cognitive tasks involving subtle non-routine judgement and those requiring large amounts of manual dexterity are now clearly in the crosshairs for technological obsolescence.

Are we at that point in the 21st century? Is Bermuda now in a full-fledged race against the machine? And what are the implications and solutions to mitigate some of the negative consequences of this potential shift?

We will attempt to cover these aspects in cursory form over a three-part series.

The theory and history of innovation on employment

Thanks mainly to the innovation of the steam engine, the Industrial Revolution ushered in arguably the first technologically driven transformation in the nature of work. The ability to mechanise entire manufacturing processes cannot be discounted.

Technological progress is a double-edged sword. On one side it is a disruptive and destructive force on labour, as workers are required to reallocate skills brought about by innovation. On the other side, the capitalisation effect benefits many by increasing demand for other goods and services and new occupations and industries are created.

The majority of economists will likely point to a common theory. By raising productivity, they argue, any automation which economises on the use of labour will increase incomes. That will generate demand for new products and services, which will in turn create new jobs for displaced workers. In the past, if you questioned this you were coined a Luddite — the name taken by 19th-century textile workers who smashed the machines taking their jobs.

History has shown that jobs do get created and net out positively. That is, in the past, innovation and advances in productivity have led to new jobs that replace displaced jobs. For much of the 20th century, those arguing that technology brought ever more jobs and prosperity have won the debate. The Economist notes that “Real incomes in Britain scarcely doubled between the beginning of the common era and 1570. They then tripled from 1570 to 1875. And they more than tripled from 1875 to 1975. Industrialisation did not end up eliminating the need for human workers. On the contrary, it created employment opportunities sufficient to soak up the 20th century’s exploding population.”

Economists have commonly touted the relationship between innovation and higher living standards for granted because they believe history justifies such a view. Industrialisation clearly led to enormous rises in incomes and living standards over the long run but it was not such a smooth ride.

But does this theory and historic precedent apply for the 21st century and Bermuda?

Is this time different, and different for Bermuda?

“Any sufficiently advanced technology is indistinguishable from magic” — Arthur C. Clarke

We are now entering a different era. One which Erik Brynjolfsson and Andrew McAfee from MIT coined The Second Machine Age and “It is a global transformation in which computers and other digital advances are doing for mental power — the ability to use our brains to understand and shape our environments — what the steam engine and its descendants did for muscle power.” They suggest there is a very real risk of economic disruption as computers and associated automation get increasingly more complex and powerful. As a result, companies will have less and less need for workers and technological progress and innovation will leave behind large swathes of people.

Blackrock CEO Larry Fink even went on record suggesting that the trend in technology will lead to global unrest as the developing world must now grapple with jobs being lost to technology. Less complex or route skills are at increasing risk as robots, computers and other forms of digital advancement are acquiring them at an ever-increasing rate and ability. But, as we note above, if history suggests innovation simply leads to the expansion of the overall economy and in tandem more job opportunities, why would it be different now for Bermuda?

Pace of change

“The greatest shortcoming of the human race is our inability to understand the exponential function” — Albert A. Bartlett

The first aspect to consider is the pace of change. Obviously if jobs are being destroyed faster than being created, innovation and technological progression is net detrimental. Countries that cannot manage the transition at a sufficient pace for workers to find new employment opportunities as existing jobs are being automated are at risk.

The rapid diffusion of technologies at a rate much faster than in the past would suggest that the race is really on. The report from Citigroup and the Oxford Martin School, Technology at Work: The Future of Innovation and Employment, notes that historically countries have adopted a new technology on average 45 years after its invention. This lag has shrunk over time.

For example, the spindle took an average 119 years to diffuse outside Europe while the internet has spread all over the globe in only seven years. Similarly adoption of new technology has increased as well. The telephone took 75 years to get to 50 million users, while the video game Angry Birds took just 35 days. Instagram reached 300 million users in just four years. Forbes has suggested that the messenger application WhatsApp gained more followers in six years of existence (700 million) than Christianity did in its first 19 centuries!

This rapid adoption and diffusion does not look to be slowing down. Digital technologies and software are connecting people globally and instantly. Ideas and knowledge are literally at the fingertips of anyone who can turn on a computer.

So the pace of new-change is increasing but what about the pace of new jobs?

According to a study by Berger and Frey (Industrial Renewal in the 21st Century: Evidence from US Cities, 2014), the magnitude of new jobs created from the arrival of new technologies throughout 2000s has been small: in 2010, for example, only about 0.5 per cent of the US workforce was employed in new industries that didn’t exist a decade earlier. Jobs are being destroyed faster than they are being created. Bermuda’s shrinking work force may exhibit evidence of this pace difference. Part of the reason for this may be the mix of new jobs.

Occupational Risk (The Mix)

Digital innovation does not only destroy jobs, but also creates jobs in entirely new occupations and industries such as database administrators and web designers. It creates a new mix of employment. As we stated above, in theory, if jobs are shed in one industry but gained in another, overall employment is unchanged and little damage is done on the macro level. The risk of course is that automating a process leads to permanent loss as the new industry substituting for the job is not available. In this case we have hysteresis and a permanent impairment to the local job market.

In a paper published in September 2013 titled The Future of Employment: How Susceptible are Jobs To Computerisation? authors Carl Benedikt Frey and Michael Osborne, of the University of Oxford, argued that jobs in 47 per cent of the occupational categories into which work is customarily sorted are at high risk of being automated.

That includes accountancy, legal work, technical writing and a lot of other white-collar occupations. The drop in the real cost of computing has created a large incentive for employers to substitute labour for computer capital. In fact the extent to which the substitution continues will only be limited to how easily the engineers can overcome pattern recognition that can replace more non-routine cognitive tasks. Studies at the Oxford Martin School even suggest that relatively skilled industries such as finance and insurance have 54 per cent of jobs at risk.

See the accompanying table from the Frey and Osborne study listing the probability of computerisation over the next decade including several jobs which are critical to the Bermuda economy.

Clearly there is substantial future risk for wide swathes of our population from advancements in computer technology and automation.

The common denominator for low risk jobs is that they tend to be highly intensive in social or creative skills and abilities. You can’t simply automate negotiations, complex interactions, or ideas. Occupations that involve original creative ideas such as media, arts, engineering and science are not easy to computerise. Nor are management, healthcare or education jobs, although automation and technology may also impact these industries.

Bermuda not only has an eerily low exposure to the employment categories which are not likely to be computerised over the next decade or so, like biochemists and biophysicists (only 2.7 per cent), materials engineers (only 2.1 per cent), microbiologists (only 1.2 per cent), computer systems analysts (only 0.65 per cent), but also has a high exposure to the jobs that are prone to computerisation.

Advanced robotics are moving towards replacing some more dexterous working aspects as well. In The Second Machine Age, the case for a highly disruptive period of economic growth is made by Erik Brynjolfsson and Andrew McAfee, professors at MIT. They suggest that machines are not just smarter; they also have access to far more data. The combination of big data and smart machines will take over some occupations wholesale; in others it will allow firms to do more with fewer workers. They even suggest that a taxi driver will be a rarity in many places by the 2030s or 2040s.

Based on the pace of change and the composition of our local market, Bermuda, unfortunately, appears to be at greater risk to the oncoming onslaught of innovative change.

Part 2 will discuss the implications for Bermuda.

Nathan Kowalski CPA, CA, CFA, CIM is the chief financial officer of Anchor Investment Management Ltd. and can be reached at nkowalski@anchor.bm