Automation, Accelerated: Will technology adoption amidst the pandemic leave Canada further behind?

Automation, Accelerated: Will technology adoption amidst the pandemic leave Canada further behind?

The past has shown us that automation often accelerates during economic downturns. While Canada has previously lagged in tech adoption, now may be the time to catch up.
Automation, Accelerated: Will technology adoption amidst the pandemic leave Canada further behind?
Creig Lamb
Senior Policy Analyst
May 14, 2020
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Since the onset of the COVID-19 pandemic, businesses have been searching for technology solutions to help them deal with the fact that some tasks, at least for the time being, can no longer be performed by humans—from sanitizing floors to transporting infectious samples. In many ways, the crisis is spurring firms to consider technologies they should have arguably already adopted to improve occupational health and safety, productivity, and revenues.

Although in many ways this economic downturn is different from those in our recent past and while some of the motivations to automate may also differ, the fact is that during economic downturns of all kinds, firms’ adoption of technology is greatly accelerated. This poses a dual challenge for Canada. 

On the one hand, it is essential for Canadian companies to adopt technology during and after the pandemic—an area where our track record has historically been spotty at best. This will not only help companies to solve some more immediate challenges, but will also help them enjoy the productivity benefits of technology investments during and after the pandemic. If Canadian businesses continue to falter in this area, they may risk getting squeezed out by the firms that do decide to automate when the dust settles. On the other hand, accelerated automation can mean that certain workers may see longer-term dislocation from the labour market. The second challenge then lies in supporting these workers to transition into gainful employment if their jobs don’t return. 

Automation, Accelerated

Automation, or the substitution of workers with technology to perform certain job tasks, is a central feature of economic progress, which can ultimately lead to job creation. But it is also a process that can create inequities in the labour market. Technology has proven to be quite effective at substituting for workers as it relates to performing routine, codifiable tasks. Since these tasks are primarily concentrated in middle-earning occupations, automation has historically contributed to job polarization across many advanced countries. For example, a study of 17 countries between 1993 and 2007 found that while industrial robots increased productivity and had little to no effect on total hours worked, they did result in fewer hours worked by low- and middle-skilled workers.

But perhaps most important in the context of the current pandemic is that these labour market shifts seem to almost entirely take place during recessions. One study found that since the 1980s in the US, the vast majority (88 percent) of job loss in routine occupations occurred within a 12-month window of the last 3 recessions. This suggests that automation is likely to be accelerated during this COVID-19-induced economic downturn. 

As a result of the current pandemic, Canadian workers already face unprecedented challenges navigating a dramatically changed labour market, in which many of Canada’s most vulnerable workers have been particularly hard hit. Workers across the economy are going to face an uphill battle integrating back into a radically altered economy during the recovery period. If automation truly does accelerate and exacerbate existing structural shifts in the economy, some of these hills may become even steeper.

How We Learned to Stop Worrying and Love the Robot

It is absolutely essential to support workers who may be negatively impacted by automation. It is just as important to recognize that automation can be a positive force in the economy. In our report, Better, Faster, Stronger, we devised a framework for understanding the impact of automation on firms and workers. To fully capture and understand the extent to which automation might impact firms and workers requires first an understanding of whether, and to what extent, firms adopt technology. When a firm does choose to invest in automation, a variety of effects take place. Yes, certain workers will be left behind. But automation can also change jobs (sometimes for the better) and help firms to improve their productivity and eventually hire more workers in the long-run.

Firms’ decisions to invest in technology are shaped by a wide variety of internal and external factors, ranging from the availability of technology; internal skills and expertise; the kind of business they run; and the external context in which they operate. In the context of a recession, the decision to automate may get accelerated for a number of reasons. As the Brookings Institute points out, in a downturn, labour becomes relatively more expensive compared to technology. As businesses become more financially constrained, they are likely to look to cut costs and increase efficiencies where they can—and technology may be one solution to do so. This may be especially true in the current downturn. Recent estimates suggest that as a result of COVID-19, nearly 1/3 of Canadian firms have seen revenues drop by 40 percent. Businesses may also look for new markets and opportunities that technology can unlock and as other businesses invest, the competitive pressure to keep up may also accelerate. But unique to the current crisis is the fact that technology can go where people cannot and perform duties that are no longer safe.

In the long-run, these investments now may lay the foundation for future growth and prosperity for both firms and workers alike.

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When a firm does decide to automate, it doesn’t necessarily mean a reduction in workers. In fact, firms that automate can, and often do, increase the number of people they employ. This is largely because of two countervailing effects: a displacement and a productivity effect. 

The displacement effect refers to what we typically think of when we think of automation, technology substituting for human labour. This process can reduce the number of workers needed for a specific job. For example, a US study found that from 1990 to 2007 there were between 360,000 and 670,000 jobs lost due to robots, an effect which was most pronounced for routine assembly line workers in manufacturing. But since jobs are made up of a variety of tasks and firms require a variety of jobs, there always tends to be work for people to do. The work just changes. In fact, automation often increases the value of, and demand for, the tasks that people simply do better than machines, like those that involve social skills. James Bessen’s account of the introduction of the ATM and its impacts on bank tellers provides a classic, illustrative example.

This brings us to the second part, the productivity effect. As firms adopt technology, they augment human labour and are able to produce goods and services more efficiently. This can help to improve product quality and lower product costs. A process that can increase demand, revenue, and margins, enabling firms to expand their operations and hire more workers overall. So while the nature of work may change within a firm and some jobs may become redundant, overall, firms that automate can become more competitive and often hire more workers.

Canadian firms must continue to invest in automation to first help address the immediate, unique challenges of the pandemic and to ensure they don’t fall further behind when it comes to technology adoption.

Automation: An uneven experience

The challenge, however, is that adoption of technology is often uneven. The firms that successfully automate may experience this productivity effect, enabling them to grow. However, the firms that fail to adopt technology may be outcompeted by those that do, which can result in a declining labour share in industries where automation takes place. Canadian firms are already laggards when it comes to technology adoption. If competitors, domestic or otherwise, accelerate tech adoption during the crisis, Canadian firms risk being left even further behind.

A study of roughly 600 French manufacturing firms between 2010 and 2015 showed that firms that adopted robots improved their productivity with fewer workers. As our framework predicts, however, this increase in productivity enabled these firms to expand their operations and increase their overall employment. However, this expansion at the firm level came at the “expense of their competitors.” Other firms that failed to adopt technology were in essence outcompeted by the technology adopters, leading to declines in their employment and declines in the overall labour share of income.

Canada already trails behind many international peers when it comes to the adoption of technology. For example, during and after the 2008-2009 financial crisis, the gap between Canada and the US in terms of investment in information communications technology (ICT) widened substantially. In 2008, nominal ICT investment per job in Canada was 68.4 percent of the US’ investment and by 2014, this had fallen to 56.3 percent of the US level. In other words, while US ICT investment per job increased 10 percent, in Canada it fell 10 percent. 

As decisions about automation are made in the coming months, Canada’s firms and workers have much to lose and much to gain. How we navigate these opportunities and challenges will play a key role in shaping our economy on the other side of this crisis. Canadian firms must continue to invest in automation to first help address the immediate, unique challenges of the pandemic and to ensure they don’t fall further behind when it comes to technology adoption. Failing to do so not only represents a major opportunity cost, but may also make the road to recovery much steeper. An equally important challenge will be to support workers whose jobs may be fundamentally changed or lost in the aftermath of the crisis.

For media enquiries, please contact Lianne George, Director of Strategic Communications at the Brookfield Institute for Innovation + Entrepreneurship.