How will automation
affect economies around the world?
·
All
countries will feel the impact of automation, but at different speeds and
in different ways. In this podcast, McKinsey Global Institute looks at its
likely impact in China, Europe, and India.
New technologies such as artificial intelligence and automation are reshaping the workplace
globally. All countries will feel the impact in some way, shape, or form. In
this episode for the McKinsey Global Institute’s New World of Work podcast,
MGI directors Jonathan Woetzel and Jacques Bughin and MGI partner Anu Madgavkar
examine automation’s likely impact in China, Europe, and India.
How will automation affect economies around
the world?
Podcast transcript:
Peter Gumbel: Hello and welcome to the
latest episode in our series on the new world of work. I’m Peter Gumbel from
the McKinsey Global Institute, and today we’ll be taking a look at the quite
different ways that new technologies like automation and artificial intelligence
will affect work in different parts of the world. Specifically, we’ll be
looking at China, Europe, and India. These differences come about for a number
of reasons that we explain in our new MGI report on the future of work, which
is called Jobs lost, jobs gained: Workforce
transitions in a time of automation. Among the reasons for these differences are different
levels of economic development, different wage rates, and different potential
for automation adoption in different economies.
Interactive
First, let’s talk about
China. Here to do so is Jonathan Woetzel, director of the McKinsey Global
Institute, based in Shanghai. Jonathan, perhaps you can start by telling us
where the Chinese workforce is at the moment. There’s been an incredible shift
over the past 25 years out of farming and into industry. What does the future
look like?
Jonathan Woetzel: The workforce is in
transition. It’s been like that for a couple of decades. The outlook is for
more of the same. First of all, China is only about 52 percent urbanized.
There’s roughly another 300 million people who are coming in from the farms to
the cities and to work in industry and services. Every year, another 10 million
to 12 million people are changing their work. And on top of that, now we’ve got
an increase of productivity in that industrial and urban
workforce, which is a function of automation but also of just an improvement in
management approaches and the investment of capital.
Each and every year,
the average Chinese worker is approximately 12 percent or 13 percent more
productive and creates more value add than the year before, which is
astounding. And that’s been going on for decades. And it says two things. One
is that the Chinese workforce can become more productive every year, but it
also says that the Chinese workforce is very unproductive right now. There’s a
lot of upside if we compare the productivity of the average Chinese worker to
the average American worker. It’s anywhere between three and six times as low.
So there’s a big gap. All of this is saying that the workforce is rapidly in
transition. It’s automating. It’s becoming more productive. It is
redeploying—the redeployment rate for Chinese manufacturing is approximately 40
percent, which means that every year, 20 percent of jobs are created and 20
percent of jobs are destroyed in Chinese manufacturing, which is astounding.
Peter Gumbel: So in terms of transitions,
China is already showing that it’s possible and actually it’s something that
can happen and not be too disruptive. Or is it extraordinarily disruptive?
Jonathan Woetzel: Well, I think it’s both. It’s
extraordinarily disruptive at the individual level. These are life-changing
moments where you pick up and go from your village. Or when you are replaced in
your workplace. But by the same token, this is now business as usual for China.
China is, I think, in many ways showing how to manage a transition at scale and
high speed, in a way which has never been done before. The thought you can
literally change the jobs of hundreds of millions of people over the course of
mere decades is astounding. If you had told anybody that this would happen 20
or 30 years ago, they would have laughed at you.
Peter Gumbel: And how does it work with the
change in skill requirements? How are they managing to cope with that?
Jonathan Woetzel: The one thing I could say
about the Chinese workforce, it’s probably the least romantic workforce in the
world. This is a workforce that does not ask the question why. It just asks
how. How will I take the next step?
For example, education.
One of my favorite stories is that it’s quite cheap to buy a degree in China.
And if you go to the XYZ University of Science and Technology, you can probably
spend a couple hundred renminbi and you can have a certificate which says you
have a degree. And so people will do that.
And then you say,
“Well, is that how you do a job transition?” And the answer is, the same time
as they’re spending a couple hundred renminbi on a degree, they’re also
spending thousands of renminbi—20 percent, 25 percent of their personal
income—on what could be charitably called skill development—going to lectures
on winning friends and influencing people, buying videos of Jack Ma explaining
how to become an entrepreneur.
People are willing to
invest in themselves. Yes, they’ll buy the degree. But they actually want the
skill. And they’ll actually pay for the skill. And that is how the job
transition happens in China. It is this vast entrepreneurial outburst of
hundreds of millions of people saying, “I want a better life, and I want to
invest in it.”
Peter Gumbel: So in our new report on the
future of work, one of the factors that we see as being very important for influencing
the timing of automation adoption is wage levels. In China, obviously wage
levels are much lower than they are in the United States or other advanced
economies. But there’s also been some changes there too.
Jonathan Woetzel: Yes, I think wage levels are
on the rise. Because first of all, China is not a labor-rich country anymore.
In fact, China has already reached its Lewis turning point. The Chinese
workforce from here on in will shrink. There is still this
agricultural-to-urban transition, but in terms of the total workforce and the
total population, we’re now on a declining trend.
So given that, the
official government encouragement to raise productivity makes a good deal of
sense. Saying, “You’re not going to have as much input, so your productivity
better go up—otherwise you’re not going to have as much growth.” From the wage
level, higher productivity should and, for the good of the country and society,
will translate into higher wages.
How that happens is a
question of income distribution. I suppose the good news is that wages and
consumption are growing faster than the overall economy, which indicates that
we are seeing some of this increases in productivity go back to the average
consumer.
For the record, over
the last decade, every decile of the Chinese working population has had
increases in income. So the population as a whole has been improving its
quality of life and its standard of living. Granted, some people have been
improving it a lot faster than others.
Peter Gumbel: Okay, so given these various
elements, you’ve got the shrinking workforce, you’ve got relatively low wages
still, and obviously you’ve got this shift into industry, how is automation
going to play out in China?
Jonathan Woetzel: First of all, China will be
very accepting of automation. And China is very encouraging of it in that it
realizes that in order for China to become rich, it needs to become productive.
And that there isn’t going to be any other path than to improve the quality and
the capacity of the workforce.
So we will see China
innovating, and everything from facial recognition to machine learning, dark
factories—these already are a feature of most Chinese industrial facilities,
certainly the leading-edge ones. At the same time, we’re going to see a growth
in income, we’ve said particularly in middle-class income. China is the world’s single
greatest consumer story with
its almost 20 percent of global consumer-income growth for the next 15 years
coming just from working-age Chinese. That, in turn, drives a huge employment
boom to provide the goods and services for the middle class, everything from
healthcare to recreation and culture to education to consumer goods.
The influence of
automation will be a factor in accelerating the productivity. But it won’t
necessarily lead to a concern about job shortages per se or, for that matter,
work shortages. There will be rather an impetus towards a use of the technology
to create more productivity in the economy, both in terms of efficiency and
also in terms of growth and providing services and value added, which will be
the new jobs and the jobs that are going to serve the middle class.
So in many ways China
is a bicycle, and one has to keep pedaling. And this is just that much more
fuel for that bicycle of growth.
Peter Gumbel: Sounds like automation is
going to be the engine in the bicycle. Thank you very much, Jonathan.
That was Jonathan
Woetzel, who is a director of the McKinsey Global Institute, based in Shanghai,
giving us his view of China. Now we’re going to go across the world to his
colleague, another MGI director, this time based in Brussels, and that’s
Jacques Bughin. Jacques, thanks for being with us.
When I was looking at
your work on artificial intelligence (AI), it was quite striking to see that
the United States and China seem to be taking the lead, whereas Europe seems to
be rather far behind. Is that a fair assessment?
Jacques Bughin: It’s a fair assessment with
two twists. Twist number one: AI as a supplier, an inventor of technology,
seems to come out from the US and China. And China has been very explicit, as a
country, to say they want to win the war for AI and be the one providing to
supply all of these technologies. The US has been quite smart in digital
technologies. We have large companies that are investing in AI. AI is actually
a necessary set of technologies to improve the products that they have.
Now Europe has been lagging in digital. And if you lag in this
technology, the learning curve is going to be tough for you. We see pockets in
Europe of AI companies. The AI tech is quite large if you look at it, but it’s
quite concentrated in cities like Zurich, most of the time in cooperation with
technical universities and obviously London. But guess what? The companies that
are in Europe has been pretty much built by the US guys. Things have been
happening like Google buying DeepMind and so on. Europe is there as well, but
it’s not as varied and as large as we can imagine.
And the second thing is
that remember, for the future of work to happen, it’s not going to be just the
ICT [information and communications technology] part and supply side. It’s
going be the development side; ie, are people adopting these technologies? And
from the data, what we see is that Europe is pretty much okay. But China is
already there. The US is slightly ahead. And some of the countries in
Europe—the digitial frontrunners, the small countries—are actually a bit ahead
in experimenting and using these technologies.
Peter Gumbel: So let’s just turn to what
the impact of automation could be for Europe. Clearly you have some issues in
including a high potential for automation and also a relatively slow-growing
economy, which based on the research that the McKinsey Global Institute has
just published, add up to essentially the idea that automation could come
earlier rather than later and have quite a big effect on the labor force. What
are the implications here for European countries and societies?
Jacques Bughin: These technologies have the
potential to shape the future of businesses and the future of work. That means
that a lot of these technologies of AI, which today are quite robust and
proven, can do cognitive tasks as well as you do.
Technology usually
drives productivity. The key question is, what is this productivity going lead
to? Is it to invest in the economy to create new jobs? And what we believe is
exactly that. It will create new, extra jobs. Jobs that you have never seen
before. Every decade, we create 10 percent of jobs that you haven’t heard of
before. Think about the day we started all using Google and search, and
search-marketing jobs were invented. Now we also invented cloud engineers. These
jobs are something you couldn’t imagine would exist 20 to 30 years ago.
And finally, if the
economy reinvests again of productivity, that means that productivity will be
spent in the economy. Net-net, we believe that there will be reallocation of
skills and jobs. Job markets could be quite resilient, and Europe is likely to
be in that case, too, provided that the productivity gains are happening and
that they’re reinvesting in the economy. That trade-off between jobs
disappearing with new job allocation will depend on the speed of adoption and
whether we use these technologies not for simply efficiency, but for exciting,
new product innovations.
And that’s the key.
These technologies will provide productivity gains that we haven’t seen in a
long time in Europe, where Europe is actually challenged by a
productivity growth which is not that
great—and on top of that an aging population, which means that the way to
create wealth in the economy is quite complex.
Peter Gumbel: There is also a question
about the redeployment and the reemployment in Europe. And Europe famously
doesn’t have very fluid, labor markets. How much of that is going be a serious
issue for European leaders to deal with?
Jacques Bughin: You put your finger on the
real issue of this picture. This picture will only happen if we manage that
reallocation. And we should not hide from the fact that this is not only complex
as a process, but the size of it is not something small. But as you said, we
have labor markets in Europe that tend to be slightly more rigid than other
markets.
A large effect is
actually job reorganization. Companies adopting this technology will have to
reorganize the type of jobs they offer. How easy would it be to do that?
Companies are going to have to reorganize the way they work to make sure they
get the juice out of this technology. So we need to make sure this thing
happens, and we know it’s an organization challenge.
Skills will be more an
upskilling game than anything else. And the skills that will be interesting to
develop obviously are skills that tend to be much more complementary to the
cognitive skills of those automation technologies. Now if we think about the
extra commutative skills that will come out, they tend to be social. They tend
to be emotional. They tend to be about creativity. So this is the challenge.
How do we unleash this
type of new skills into business processes? These are skills that possibly we
never get the chance to nurture in the way we work because they were not
needed. But, you know, think about you as a kid. The mobility within industries
is actually quite small. In this case, obviously the impact of technology would
be very different sector by sector. And the mobility will require both upskills
and possibly intersectoral mobility. This is possibly one of the key
challenges: How do we do this? How fast can you get reorganization internally?
How fast can we get upskilled for the new jobs to be fitting to interact with
automation technologies? And are you prepared to be inter-mobile across
industries?
That’s not the same as
a rigid, labor market. It’s actually three things within the labor market that
needs to happen whatever the country is where you are. If this takes too long,
if it takes two to three years for any individual to do, that’s going to create
friction. And that friction has to be managed to be shorter. From a social
point of view, we need to find ways that people can have the financial means to
address that transition. It’s not a question of either/or.
Europe is actually the
test bed for that because we have an interesting social-security potential. And
on top of that we see countries slowly adopting this experiment with the two
sides of social and technology. So let’s learn from that, is my message.
Peter Gumbel: So let’s just pick up the
last point on the social safety nets. Do you think that the European welfare
state, as it exists, is sufficiently adaptable to provide the transition and
income support that displaced workers are going to need in this transition
period?
Jacques Bughin: It’s a very, very big
question. I think that like every evolution, we will need to find a way to
experiment and to adjust. I would just give two or three ideas. And these are
just ideas that may not be great. But I think the plea from your question is
much more to focus on, why not experiment with many things to see what can
work?
A few things could
happen. If we believe that social security has to be adapted, instead of giving
people an amount of money for unemployment, why not give this type of money to
create a lifelong-learning platform that they can co-finance across firms, for
people like you and me to start learning even more than they did before?
Why not make sure that
instead of working so many hours a week, ensure a portion of it—2 percent, 3
percent, 5 percent of that—is actually devoted for new learnings. And these
learnings, if you do them right, will give you the rights basically to get
points for your pension in the future. In this concept, instead of adjusting
the number of hours to work, because there will likely be a bit less work in the
future, you will still work. But you work for the future. Firms have an
incentive to possibly even co-finance because firms are not bad guys. They’re
not there to take people out. They want people that are good at doing their job
and complementary with capital. And for them, they need these skills, and these
skills come from job trainings most of the time. So these are a few examples
that we could imagine doing.
Peter Gumbel: Well, thank you very much,
Jacques. That was Jacques Bughin talking about the promise and the challenge of
automation technologies in Europe.
Now we’re going to go
to India, where the situation is quite different. Talking to us about the
situation in India is Anu Madgavkar, who is an MGI partner based in Mumbai.
Anu, tell us about how the Indian employment market looks today and what it’s
going look like in the next 15 to 20 years? We can see that a very young,
dynamic population is growing fast. That presumably will have a big impact on
employment and the and the labor market. Is that indeed the case?
Anu Madgavkar: India has a labor force of
about 450 million, so it is a very large labor force and it’s growing, as you
say, adding something like eight to ten million every year. So I think the
predominant question on people’s minds in India is really, where will the jobs
come from? And the concern tends to be really around this notion of jobless
growth, questions such as, “Maybe the economy’s growing at six or seven
percent, but are there jobs?”
When we looked at some
of the data, we found that the issue in India is not so much about the quantity
of jobs that matters, but the quality of jobs. And by the quality of jobs, we
mean things like the productivity that workers are actually able to generate,
the output, and the wages. And a whole bunch of other conditions around their
work, whether it’s income security, whether it’s being part of a more organized
and formalized value chain, decency in work. It’s those kinds of issues. And
the reason why the quantity of jobs is less important is because most of the
Indian workforce is in the unorganized and informal sector. It’s very rare that
somebody would be unemployed.
In fact, the
unemployment statistics are not very reliable in India. Unemployment is
traditionally as low as 4 percent and pretty much stays there through up and
down cycles. It doesn’t mean much. People just end up doing any kind of work
that comes their way, and therefore they’re technically employed, but the issue
is that they’re not really employed in gainful work or in productive work.
So the issue for India
is really how to boost the rate of job creation in sectors and occupations and
types of work that generate more income and more linkages of workers with
organized parts of the business. And that is an issue we see. We see some
evidence that some things are working well in India. But we do have concerns
about whether that pace is good enough and a set of things that we need to do
to make to accelerate that base.
Peter Gumbel: But at least the economic
growth is robust, and that presumably is raising demand and helping propel
consumption, which in turn creates jobs. So how important is that as a sort of
a motor going forward? Is that going to be what really determines the whole
employment picture?
Anu Madgavkar: Absolutely. In fact, we’ve
looked at the data that suggests that in periods when the economy grew at 7 and
7.5 percent, the labor market actually saw a very positive transformation in
the sense that there was an accelerated growth in the employment in sectors
like construction, trade, transportation hospitality.
These are really the
mainstays of job growth in any emerging or developing country like India. These
sectors actually saw maybe 11 to 12 million jobs per year being added, while
the agricultural sector actually saw labor coming out of it. This is really important
because if you compare a typical construction-sector worker with an
agricultural-sector worker, there’s a 70 percent uplift in productivity that
comes from moving out of agriculture and moving into construction.
If we move out of
agriculture and move into the transportation and logistics sector, that’s again
an 80 percent uplift in productivity, with a commensurate wage benefit or
impact to the worker. This structural transformation—where workers are less
dependent on low-productivity sectors, even at relatively low or medium scale
levels, but moving into sectors that are fundamentally more productive—happens
when the economy grows. Therefore economic growth is actually probably the most
important driver of long-term, labor-productivity growth for the country.
Peter Gumbel: And this move out of
agriculture, which is a shift we’ve seen in other countries—in the United
Kingdom, in the United States, but also more recently in China—how recently did
that begin and how much more has it got to run, would you say?
Anu Madgavkar: I think it has to run a lot
more because I think we’ve seen it start to move in the last ten to 15 years. I
mean the Indian economy only liberalized in the early ’90s, and we did see
sectors, mainly the services sector, actually grow only from then.
And therefore, I think
we still are in a place where 45 percent or so of the labor force continues to
depend on agriculture. We have a long way to go, and we have to make this
transition in an era where creating jobs out of manufacturing is going to be
more challenging, simply because of automation playing a bigger role in several
types of manufacturing.
I think India has to
think about a multi-polar strategy. It has to have engines firing in terms of
sectors like infrastructure building, building out cities, which creates demand
for lots of urban services and construction. It has to think about how to take
the benefits of IT and digitization deep into lots of types of work that can
enable less skilled workers to actually use their technology and be more
productive.
It sounds
counterintuitive, but there are very interesting examples from India where
technology-based financial services are being taken deep into rural India by
these armies of banking correspondents who are middle-skill or even low-skill
people but enabled by technology to be more productive than what they would
otherwise have done.
We will have to find
multiple engines, and I think we can’t minimize the role that manufacturing has
to play as well. There are sectors in manufacturing where India can do more;
the textile and garment sector is one such example. We can do more in in other
areas as well. But it’s got to be a combination of sector-oriented policies
that boost demand across many of these areas to absorb that labor out of
agriculture.
Peter Gumbel: You mentioned automation in
conjunction with manufacturing. But more broadly, how do you see automation
impacting the Indian economy?
Anu Madgavkar: We do see automation
impacting the workforce as businesses across sectors adopt more technology. But
we do find that, relative to more advanced economies, because average wage
rates are still much lower in India than in advanced economies, that threshold
at which it makes sense to automate a task or automate a worker’s work—that
threshold is much lower.
We would not see as
rapid a trend towards automating work as you would in the advanced economies.
But nevertheless, I think you would see something like the equivalent of 60
million workers potentially being substituted by technology in some shape or
form by 2030. So the challenges of retraining and redeployment are not
insignificant, even in India.
Peter Gumbel: They’re not insignificant,
but it sounds like the challenges are more around how to create gainful jobs
and how to find work for this very large cohort of young Indians coming onto
the labor market.
Anu Madgavkar: That’s true, and I think the
challenge gets a little bit compounded with the changing and rising aspirations
and expectations of the workforce. Our analysis would suggest, for example,
that there are more than enough jobs that could be created by boosting, let’s
say, infrastructure, urbanization, investment in affordable housing.
Interactive
A lot of these jobs are
going to be in the construction sector. Now the issue really is, is there a
mismatch between what young people want versus the kind of work that’s out
there? I think there is a generation of young people in India who’ve grown up
with the aspiration being the white-collar office job, which is typically a
clerical job.
But that’s the kind of
job that will get automated. Therefore, there is something to do with finding
more meaning and more value in doing different kinds of work even while we need
to take steps to make that work decent and not hazardous. Even as we do that,
there is something about the mind-set of workers and what they expect as well.
Peter Gumbel: Last question is around
Indian technology, because obviously India has done very well with IT and has
become a global player. Is there an opportunity here with automation for India
to leapfrog and really move ahead fast and therefore speed its development?
Anu Madgavkar: I think there is. I think
India’s IT capabilities are an important part of its foundational digital
capabilities, right. As you think about India’s economy, one of the important
capabilities is that you have a strong IT sector and they have innovated a
business model that’s worked very well for the last maybe two decades.
The demands of that
type of work are changing very rapidly because of automation. That’s the first
trend we need to recognize, that digital skills and capabilities are going to
be more important for the IT sector, and for workers in the IT sector going
forward, because the clients they serve are going digital.
We also need to
recognize that the IT sector is moving up the productivity curve very rapidly.
And therefore, the job creation for IT professionals in terms of the IT-services
industry will continue to grow but perhaps not at the pace that it has grown in
the past, because they will move to productive work.
So that’s, if you will,
on the negative side. You do need to build new capabilities, and your
job-creation pace may be slower. But there are a huge set of positives in terms
of the opportunities, because as Indian businesses adopt more digital
capabilities close to business, the hiring needs of an Indian consumer-products
company or an Indian financial-services company are moving towards people who
have skills in digital and in technology.
The IT-services sector
may not hire at the same pace, but people who have the right skills can move
into all sorts of different types of firms that are thinking through how they can
digitize. And then this whole issue of inclusive digital transformation is a
very important one in India. And I think that is also going to sustain a lot of
productivity growth and job growth going forward.
Peter Gumbel: Thank you very much indeed,
Anu, for that interesting discussion of the employment situation in India,
given the current rapid growth of the workforce.
And that concludes
today’s podcast by the McKinsey Global Institute on different aspects of the
changing and very new world of work. We hope that you’ll be listening in to
further episodes of our podcast series, which covers issues ranging from how
technology has played out on issues of employment in history and whether this
time anything is different to questions about skills and potentially the wages
in the future as these technologies are increasingly adopted in the workplace.
https://www.mckinsey.com/global-themes/future-of-organizations-and-work/how-will-automation-affect-economies-around-the-world?cid=podcast-eml-alt-mgi-mgi-oth-1803&hlkid=c262ceba88674301a1f3c729a9ce1a1a&hctky=1627601&hdpid=1617887b-ee0a-4cf2-8f75-d9bc57af76c3
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