COVID-19 Crisis and Employment Adjustment

COVID-19 is causing significant damage on a global scale. Urgent policy issues are being discussed to ensure both the protection of human life and the maintenance of employment. The current situation challenges us to use our collective wisdom to overcome this global disaster. As disasters of this magnitude tend to reveal various aspects of society, economists need to engage in a dispassionate analysis of the situation and make policy recommendations that can benefit all. We are therefore interested in addressing the long-term issues concerning employment.

In recent years, two concerns related to employment have been debated as long-term issues in Japan: 1) labor shortages caused by population decline and 2) the substitution of labor with artificial intelligence (AI).

The first issue has continued to be debated for some time, but a consensus on fundamental solutions has not yet been reached. As is well known, developed countries, especially Japan, are experiencing declining and increases in proportions of their elderly populations. Securing a workforce is a significant challenge in the face of a declining population in a super-aging society. In its efforts to stop the population decline, the Japanese Government quickly implemented a series of policy measures: the promotion of women's professional careers, measures against a declining birth rate, and a shift in policies regarding foreign workers. Although some of these efforts have produced positive results, the overall trend of population decline is expected to continue.

Regarding the second issue, the question of labor substitution with AI is relatively recent. People are vaguely anxious that AI might steal their jobs. Many people were shocked by the findings of a report published by Nomura Research Institute in 2015, which stated that, in 10 to 20 years, the substitution of 49 percent of employment would be technologically possible. However, we need to remember this is only a technological possibility. Even if we develop technologies that permit such substitution, actual substitution would not be realized unless it offers economic benefits. Therefore, what are the most likely actual impacts of such substitutability?

The threats of labor substitution such as that posed by AI have occurred many times in the long history of scientific and technological advancement. This can readily be seen in the history of the Industrial Revolution, which can be classified into different phases. The First Industrial Revolution began in England in the mid-18^th Century and expanded into other countries during the 19^th Century. Technological innovation produced a new source of power, the steam engine, and accelerated mechanization, particularly in light industries such as spinning mills. Consequently, the Industrial Revolution enabled mass production, cost reduction and the stabilization of product quality, ultimately increasing previously stable per capita GDPs at a rapid rate. The Second Industrial Revolution occurred in the second half of the 19^th Century mainly in Germany and the United States and brought innovation in industrial technologies into the heavy industries and the chemical industry, which adopted electricity and oil as new sources of power. The Third Industrial Revolution occurred in the second half of the 20^th Century and accelerated the automation and efficiency of production via information technology, computers and industrial robots. Finally, the Fourth Industrial Revolution, occurring at present, is being driven by AI, IoT and robotics.

These industrial revolutions enabled significant economic growth but cost many workers their jobs. Existing labor was substituted with machines. Consequently, skilled workers lost the value they previously had in production processes. However, new employment opportunities were also created. The First Industrial Revolution gave birth to railroads and the steel industry, the Second Industrial Revolution created the automobile industry, and the Third Industrial Revolution fostered the information industry. This shows that jobs are both lost and created through the advancement of new technologies.

Our study examined the impacts of introducing industrial robots and analyzed the effects of this introduction on the Japanese economy (Note 1). Japan is unique because the country has continued to promote the large-scale introduction of industrial robots since the 1970s, ahead of other developed countries. Additionally, the long-term data on industrial robots maintained by the Japan Robot Association allows us to conduct long-term analysis. Methodologically speaking, the current study needed to determine how to address endogeneity in order to identify causality. However, we solved this issue by utilizing detailed data from the Japan Robot Association on the number of shipped units and the amount of shipment categorized by the types of robotic applications and destination industries. Our analysis revealed the introduction of robots increased employment in Japan, a finding that differed from existing research conducted in other countries. We believe this finding is an indication that the impact of labor substitution involves not only a reduction in employment but also the achievement of lower prices and greater competitiveness as a result of improved productivity. This in turn can create scaling-up effects that lead to an increase in employment.

Technological innovation can act as a driver of economic growth. However, because the introduction of new technologies causes labor substitution, it is met with significant resistance by those who may lose their jobs. For example, during the First Industrial Revolution, England experienced the Luddite movement for a number of years (1811–1817), during which skilled workers who lost their jobs destroyed machines and factory buildings. At the same time, collective bargaining took place between workers who demanded the improvement of the working environment and their employers. To counter such movements and generate significant change, we need social mechanisms that can embrace new change. For example, newspaper articles from the 1980s reported the sentiments of corporate managers from that era, who collectively observed that the introduction of industrial robots to the factory floor met little resistance from workers in Japan, where workers could be easily reassigned to different job types within the company, but in Europe, where workers were strongly bound to specific occupations, workers fiercely resisted the introduction.

Technological innovation is said to result in creative destruction. The introduction of a new technology tends to accompany the destruction of existing labor tasks and the destruction of both existing human capital and material capital through the substitution of old machines with new ones. This means that, for continued growth, organizations need mechanisms that can embrace creative destruction. AI's substitutability is merely a possibility. What is important is the mechanism that allows organizations to realize this substitution. The current COVID-19 crisis has forced many people to experience working from home. Through this experience, many people are likely to have become aware of the unimaginable extent to which many existing technologies have evolved. Additionally, many employers have realized that employees can maintain high productivity while working remotely. In contrast, some believe remote work has made it more difficult to observe employees' efforts, which can lead to a sudden spread of a results-oriented salary system and inequality. However, this type of argument—even though it may be proven to be correct—creates anxiety for many people. Rather than unnecessarily stirring up anxiety, we need to use this crisis as an opportunity to construct a new scenario and to create mechanisms to achieve it. In this scenario, new technologies would permeate every corner of society, productivity would be improved, and people would enjoy the fruits of these new achievements.

Labor-intensive industries, which tend to involve substantial contact with people, have been especially hard hit by the current COVID-19 crisis. The work style has started to shift so that labor-intensive tasks can be completed with fewer workers. This will reveal the presence of unnecessary employment and inefficient staffing. Currently, as the population decline continues, the COVID-19 crisis may prompt the introduction of new technologies (e.g., automation through the use of AI and robots) and labor substitution on a greater scale. This is both a threat due to labor substitution and a starting point for the next phase of growth. In retrospect, Japan was at the cusp of rapid economic growth when the Japan Productivity Center was created under the Three Principles of Productivity: 1) maintenance and expansion of employment, 2) cooperation and consultation between labor and management, and 3) just distribution of profits. As this was a different time, it is unrealistic to replicate it today. However, the challenge we face is essentially the same. We need a fundamental principle that defines how our society will embrace new technologies and mechanisms to support this scenario.