Looking back over recoveries from previous recessions in the United States, rapid job generation usually occurred. During the 1970s and 1980s, for example, the first two years of recoveries saw an increase of over five percentage points in unemployment.
However, since the 1990s, the “recovery engine” has ground down to a near crawl. In the first two years of the Great Recession, job gains, on average, generated less than a one percentage point increase in employment. The question is – What is driving the polarization of the jobs market?
Routine-biased technological change (RBTC)
Previous research has suggested that new technologies developed to replace repetitive, middle-skill jobs and complement analytical, high-skill jobs is to blame. The term for this is called “routine-biased technological change (RBTC).”
Giovanni L. Violante, an economist at New York University uses the phrase, skill-biased technical change, meaning a change in job skills that favor a certain class of workers. He writes: “Skill-Biased Technical Change is a shift in the production technology that favors skilled over unskilled labor by increasing its relative productivity and, therefore, its relative demand.”
To put this shift in perspective, think about word processors replacing typists or engineers using AutoCAD software. And for a long time, economists didn’t think the changes in technology would have any great effect on the economy, at least until recently.
What is ‘Creative Destruction’
The term “Creative Destruction” was coined back in 1942 by Joseph Schumpeter in “Capitalism, Socialism and Democracy.” It describes the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
The term could be explained this way — Creative Destruction can occur when innovation ends up taking apart long used practices (think about word processing and secretaries), freeing up resources that can be used elsewhere. Schumpeter pointed out in Chapter VII of Capitalism, Socialism and Democracy, “The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process.”
Schumpeter believed that economic development was guided by forces within the market that, if they were positive, created opportunities to seek profits. Such a process can be observed in the contemporary building of businesses. His use of the word, “Destruction” only means there will be some losses along with profits, just like there are losers and winners in the stock market.
Schumpeter’s theory of economics accounted for entrepreneurs and technology being disruptive, whereas many other theories ignore these two important drivers of profits. One excellent historical example of his theory of disruptive processes would be Henry Ford’s introduction of the assembly line. Not only did it revolutionize the automotive industry, but it put many people out of work.
The same disruption of the economy took place with the introduction of the Internet and Dot-com companies in the 1990s. It led to a disruption in the economy and prompted a social reorganization. The ones who lost in this were the old economy companies who refused to change.
Understanding what is going on using data analytics
Recoveries from the last three U.S. recessions, (1991, 2001, 2007–09), resulted in little employment rebound, even though there was a rebound in economic output. One theory postulates that if the adjustment to new technology is sudden, this could lead to a lot of displaced workers who don’t have the right skill-sets.
A recent study published in the online journal, National Bureau of Economic Research (NBER) examined how the demand for skills changed over the Great Recession (2007-2009). Boston, Mass.-based Burning Glass Technologies, an analytics company collected almost all the electronically posted job vacancies in 2007 and 2010–2015, as well as geographic differences in economic conditions during the same time periods.
The research found some intriguing correlations: “The skill requirements of job ads increased in metro areas that suffered larger employment shocks in the Great Recession, relative to the same areas before the shock and to other areas that experienced smaller shocks.”
The research also found that job ads in hard-hit metro-areas were 16 percent more likely to contain education and job experience requirements, and additionally, eight to 12 percent required the job applicant needed to have analytical and computer skills. And while the job market has reverted to pre-recession levels, the differences in job skills remain.
What does this all mean?
According to the research paper, they concluded: “We argue that this evidence is consistent with the restructuring of production toward routine-biased technologies and the more-skilled workers that complement them and that the Great Recession accelerated this process.”
Specifically, the job requirements analyzed in the research, including education, experience, analytical aptitude, and computer skills, all complement the new technologies we have today. The structural shift is in line with RBTC because the skill requirements correspond with additional capital investments for both metro and individual firms.
