This Christmas, let’s all reconsider how we think about innovation, jobs and wages

There is still time to have a last minute Christmas present delivered. No, of course not by Royal Mail; but one of its enthusiastic competitors will do the job.

Given the impact which technology in general and the internet in particular has had on postal service, it is hard to imagine a more pointless strike than the current one.

The gift you should get is highly relevant to companies such as Royal Mail. It is an important book by the leading economist Phillipe Aghion and colleagues, entitled “The Power of Creative Destruction”. In it, the authors set out both the positive and negative impacts of innovations and new technology.  

Aghion combines developments in economic theory with a mass of empirical evidence to create an interpretation of the world that reminds of the theories of Joseph Schumpeter, one of the most influential economists of the first half of the 20th century. This interpretation is still fit for purpose in the 21st century.

Joseph Schumpeter was born in Austria, and made his career at Harvard. He broke decisively with the then-orthodoxy that the distinguishing feature of successful market economies is how people and firms respond to changes in incentives brought about through movements in prices.

He by no means dismissed the influence of the price mechanism. But Schumpeter identified innovation as the critical dimension of economic change. He coined the memorable phrase “gales of creative destruction” to describe the huge impact which major innovations have on economies.

As Nobel Laureate Angus Deaton has pointed out, the very term “creative destruction” expresses a contradiction at the core of capitalist economies. Creation brings innovation, growth, and prosperity. But the destruction of inefficient firms and old technologies – demanded by innovation – engenders resistance and stagnation.

Aghion and his fellow authors are in no doubt that the net impact of innovation is unequivocally beneficial. They go into economic history to show that we owe our modern living standards to innovations enabled by market-oriented capitalism.

But it is when Aghion gets down to the detail of what happens to the individual firm that the most interesting and surprising results emerge.

Comparing innovative firms between them and with non-innovative firms, there is no extra premium for highly skilled workers in innovative firms. However, the wages of less skilled workers are noticeably higher for all age groups in innovative companies.

The authors attribute this to high skilled workers being remunerated mainly on the hard skills they have acquired. In contrast, the less skilled are valued in innovative firms for the soft skills they have built up in the company-specific context. Such companies, for instance, value reliability highly.

A further, seemingly paradoxical, finding is that the effect of automation on the number of workers in a firm is on average positive. It creates more jobs than it destroys, even for unskilled workers.

This is of course an average across a very large sample of companies. The key point is that if a firm is reluctant to embrace new technology, it becomes much more vulnerable to its more innovative competitors. Measures which appear to defend jobs in the short-term eventually lead to a substantial loss of employment.

This result is highly relevant to the current disputes across the public sector, which are as much about resisting changes to working practices as they are about pay increases.  

It is good to read a book whose message is so optimistic. And it is a pleasure to read one which is so meticulously researched and convincingly argued. Maybe more people at Royal Mail and beyond should pick up a copy.

As published in City AM Wednesday 21th December 2022
Image: Flickr
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