The effect of Automation, Offshoring, and Low-Skilled Immigration in the U.S. Labor Market

The e¤ect of Automation, O¤shoring, and Low-Skilled Immigration in the U.S. Labor Market.1 Federico Mandelman (Federal Reserve Bank of Atlanta) GIC-UCEMA Conference March 2018

1 The

views in this paper are solely the responsibility of the author and should not be interpreted as re‡ecting the views of the Federal Reserve Bank of Atlanta or the Board of Governors of the Federal Reserve System.

F. S. Mandelman (Atlanta Fed)

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The demise of middle-skill employment

In the last 35 years, middle-skilled workers experienced protracted job losses in the US. On the other hand, net job gains obtained at the tails of the skill distribution (highest/lowest skill)=) Labor Market Polarization.

Other advanced economies witnessed the same phenomena (Acemoglu and Autor, 2011).

This Presentation: Automation, O¤shoring and Immigration seemed to play an important role.

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Labor Market Polarization Change in the Share of Employment of occupations ranked by skill level (approximated by mean wage of each occupation in 1980).

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Demise of Middle-Skill Jobs Blue Collar (operators in manufacturing) and White Collar (administratives) doing "Routine" work Technology Routine Biased Technological Change7!“Routine Tasks” can be broken down in a well-de…ned set of procedures7!coded and replaced by computers/robots.

E.g. Operators by Robots and Administratives by Computers.

O¤shoring Many jobs where o¤shored overseas !Advances in telecommunications and decline in trade costs E.g. Operators to China, Costumer and Administrative support to India.

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Growth in High-Skilled Occupations They require creativity and/or human interaction skills (e.g. managers, programmers, Product Designers, R&D) Technology These "cognitive" skills are very hard to automate (for now!.. more discussion later) O¤shoring In principle, many of these jobs can be executed overseas, but... ! U.S. has a comparative advantage in these occupations.

E.g. Nothing prevents Silicon Valey to reallocate overseas, but hard to …nd that "unique" type of human capital.

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Growth in Low-Skilled Occupations Manual and Service Occupations: janitors, nannies, home cleaners, home health aides, gardeners, construction laborers Technology Very hard to Automate as well: The require manual handling and interaction with unpredictable human beings.

O¤shoring "Non-tradable" jobs: Mentioned jobs must be executed where the …nal consumer is located. ! They cannot be o¤shored overseas.

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Low-Skilled Immigration since 1980 These service jobs cannot be o¤shored overseas... ..but nothing prevents immigrants to move to the U.S. to do the work The share of foreign-born in the US population more than doubled from 6% to 13% (Hanson & Grogger, 2011) A disproportionate number of the migrants were relative low-skilled.

Foreign-Born job creation mostly occurred in the low-skill segment.

Native job creation mostly took place in the high-skill segment.

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US Labor Polarization: Natives vs Foreigners

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Increase in Immigration: Decline in Low-Skilled Wages?

Wages rose robustly for the high-skilled, but performed poorly in middle-skill occupations! Same as employment.

However low-skilled wages did not match the strong increase in low-skill service jobs.

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Two Waves of Automation

1 Equipment technology (Computers and Robots) Started in the 1980’s and broadly implemented in the 1990’s

These innovations a¤ect middle-skill workers doing routine labor.

2 Advanced Software Started in the1990’s and started to be implemented in the 2000’s.

-These innovations a¤ect high-kill workers (cognitive abilities) -Further developments in Arti…cial Intelligence (AI) can also dent in high-skill employment.

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Equipment vs Software (Aum 2018)

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F. S. Mandelman (Atlanta Fed) Automation, O¤shoring and () Immigration March 2018

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High Skill (Cognitive)-Trend Reversal after 2000.

Per Capita Employment (Employment over Population 16+ years)

-1.5

-1.55

-1.6

-1.65

-1.7

-1.75

-1.8

-1.85

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F. S. Mandelman (Atlanta Fed) Automation, O¤shoring and () Immigration 2009 - Q1

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Medium Skill (Routine) Per Capita Employment (Employment over Population 16+ years) -1

-1.05

-1.1

-1.15

-1.2

-1.25

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F. S. Mandelman (Atlanta Fed) Automation, O¤shoring and () Immigration 2009 - Q1

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Low Skill (Non-Routine Manual) Per Capita Employment (Employment over Population 16+ years) -1.92

-1.94

-1.96

-1.98

-2

-2.02

-2.04

-2.06

-2.08

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Model Quantitative Analysis

In Mandelman & Zlate (2018) we have two objectives: 1

Developed a Quantitative Structural model of the US economy suitable to account for all these data.

2

Quantify the e¤ects of Automation, Immigration and O¤shoring on the well-being of all U.S. households.

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Automation Data

1-Relative Price of ICT (Info, and Communic Tech) and NON-ICT Capital 2-Stocks of ICT and NON-ICT 3- Income Share of ICT F. S. Mandelman (Atlanta Fed)

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O¤shoring Data

1-Share of O¤shore Employment 2-Trade Costs 3- Expo+IMPO/GDP F. S. Mandelman (Atlanta Fed)

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Model Results O¤shoring/Globalization Bene…ts High-skilled Expanding demands for their skills and cheaper intermediates.

IPhone designed in the US, cheaply assembled in China, and sold Worldwide.

Displaces Middle-skilled Manufacturing and o¢ ce support workers.

Bene…ts Low-skilled High-skilled demand more services.

IPhone designers go more often to the restaurant and buy bigger houses (gardeners, construction workers, cleaners, nannies, waiters..)

Welfare Gains -US specializes in high-skill tasks where is most e¢ cient.

-Gains o¤set by middle-skilled downgrading and moving to less productive service jobs.

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Model Results Immigration Low-skilled immigration supports employment in services.

Welfare Gains Although immigrants depress low-skill wages...

They keep US non-tradable prices low, increasing the competitiveness of US workers !+ Price of Non-Tradables!+ Real Exchange Rate.

Upskilling: Natives move-up to more skilled jobs. e.g. cheaper child care let women join the labor force.

More micro-evidence in Peri (2018)

Training Do not want to compete with low-skilled migrants.

More micro evidence in Hunt (2015) and Peri et al (2017)

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Model Results Automation Welfare Gains Automation increases productivity and aggregate income.

Middle-Skilled are replaced …rst (Assemblers and o¢ ce workers)...

High-Skilled next (Programmers and Accountants) More workers employed in services (manual/human interactions) Further Discussion Puzzle: Automation had a very small e¤ect on employment: Income share to ICT very small.

See also Acemoglu and Restrepo (2018) and Jaimovich and Siu (2017)

Mismeasurement of the new economy?

Future Research: Social Skills & Creativity skills are getting more valued (see Cortes, Siu, Jaimovich, 2018) F. S. Mandelman (Atlanta Fed)

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Welfare analysis

Welfare Gains Immigration Automation O¤shoring

Full Model 5.44 1 1.25

No Training/Upskilling 1.34 3.05 5.91

Note: Refer to the main text for details.

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