Automation, Job Displacement, and Risk Management

Introduction

With Elon Musk of Tesla advancing the field of automation at a rapid pace and envisioning a million "robotaxis" on the roads by 2020, the question of risk management must be considered carefully with respect to automation. Numerous companies are turning more and more to robotics. Amazon uses robotics in its shipping and supply warehouses to streamline processes and keep shipping moving at an acceptable rate. One of the risks created by this advancement in technology, however, is the risk of automation displacing human employees. This risk carries substantial social and economic downsides, as well as potential political risk, since political backlash tends to follow social and economic disruption.

When America began offshoring jobs in the 20th century, it resulted in the rise of the working poor and the widening of the income gap between the upper and lower classes. If more workers are displaced by automation in the coming years, it could represent another downward trend for unskilled laborers, as jobs are either exported or eliminated through automation. This paper examines what experts in the field — De Smet, Lund, and Schaninger (2016), Goldsmith (1994), and Wike and Stokes (2018) — have to say on the topic and discusses what it means for the field of risk management in general.

Background on Social and Economic Risks of Job Displacement

As Wike and Stokes (2018) point out, concern over automation displacing jobs is a global phenomenon: "In South Korea, there are more than 600 installed industrial robots for every 10,000 workers in manufacturing facilities. In Japan there are more than 300 and in the United States nearly 200. Profit maximization, and the relatively high cost of human labor, helps drive automation" (p. 2). Automation is happening whether people welcome it or not — and there are very definite risks not only for individuals but also for the global economy, which depends upon consumers having disposable income.

If consumers all become the working poor — that is, individuals who work low-skilled, low-paying jobs and rely on government subsidies for basic expenditures such as housing, health care, food, and education — there will be little to no disposable income to support the broader economy. Either all markets will end up becoming centrally planned (which has not worked well historically, as the Soviet Union illustrates) or they will crash — and some combination of the two may very likely occur. The public has taken notice. Wike and Stokes (2018) note that "in all 10 advanced and emerging economies polled, large majorities say that in the next 50 years robots and computers will probably or definitely do much of the work currently done by humans. In three countries — Greece, South Africa and Argentina — four-in-ten or more believe this will definitely happen" (p. 3). It is therefore important to consider what this means and what risk management professionals should account for. The rise of automation risks leading to a greater expansion of the working poor.

Economic Risk and Problems Currently Impacting the Sector

Job displacement in the U.S. has contributed to the rise of the working poor. According to the Center for Poverty Research (2018), the working poor are "people who spend 27 weeks or more in a year in the labor force either working or looking for work but whose incomes fall below the poverty level." There are currently approximately 12 million working poor in America (Policy Link, 2019).

The demographics show that the working poor in the U.S. generally fall into the following categories:

By race/ethnicity: 11.7% Black, 11.7% Hispanic/Latino, 5.5% White, and 4.3% Asian. By gender: 7.2% women and 5.5% men. By education: 18.3% with less than a high school diploma, 8.3% high school graduates with no college education, and 2% with a bachelor's degree or higher (Center for Poverty Research, 2018).

Latinos and African Americans make up the largest shares of the working poor in the U.S., and women tend to be represented among the working poor at higher rates than men — often because they are single mothers. Nearly one in five working poor individuals lacks a high school diploma. Nearly 10% have no college education, and only 2% of the working poor have ever obtained a bachelor's degree. Education is therefore a significant factor in explaining the conditions of the working poor, as most have never obtained a four-year degree that could open doors to better employment.

Moreover, the Pew Research Center (2014) shows that the gap between the rich and everyone else has never been wider: "America's upper-income families have a median net worth that is nearly 70 times that of the country's lower-income families, also the widest wealth gap between these families in 30 years." The average income for wealthy households is $634,000 per year. The average for middle-income families is $96,500. The average income for the working poor is $9,300 — less than 10% of the middle-income family's earnings, and just over 1% of the income at the upper end of the upper class (Pew Research Center, 2014). These figures illustrate a staggering gap between the rich and the working poor in the United States.

As Lee (2018) notes, the working poor consist of "those who tip-toe just above the government's official poverty line, which for a family of four means an annual income of less than $23,850 and for an individual means an annual income of $11,670." Recent reports suggest that more than 50% of food stamp recipients are the working poor. Many of them are migrant workers, making it difficult to capture accurate data on homelessness, as statistics are not readily available (Lee, 2018). They move from rural area to rural area for seasonal work, or they migrate to urban centers. Many of the working poor live in suburbs today — for example, in Atlanta's suburbs, where more than 80% of the region's working poor can be found (Lee, 2018). The geographic distribution is, in other words, complex.

As many unskilled workers relied on manufacturing jobs in the 20th century, they were able to find stable employment until manufacturing in the U.S. began to be offshored. This created a vacuum for the unskilled worker, who struggled to find employment following the erosion of America's manufacturing base. Today, these workers have been forced into low-skilled, low-paying jobs in the services industry — working as bartenders, waiters, waitresses, housekeepers, tutors, or nursing aides. Some service positions pay more, but those that do typically require credentials earned through four years of college — credentials that only 2% of the working poor possess.

The loss of low-skilled manufacturing jobs has left low-skilled workers treading water in service roles that pay less and, in many cases, depend on tips. This trend was driven by the rise of globalization in the latter half of the 20th century. Corporations found that they could obtain cheap labor overseas and began sending work to Asia and other parts of the world to increase their profit margins. This negatively impacted domestic workers, who now found themselves without recourse to the manufacturing jobs that had previously sustained them.

Conclusion

The issue of automation and the risk it brings of displacing jobs is a real one that must be faced, according to the experts in the field. The companies of the world are moving more and more toward automation, but they may be rushing headlong into their own demise. Companies must participate in a two-way exchange with communities: they provide jobs and communities provide consumers. If that exchange becomes one-sided, the relationship breaks down and social organization falls apart altogether. This is the greatest risk of all, and it is one that risk management professionals, policymakers, and business leaders must urgently address.