Category Archives: Innovation

27/7/17: Work or Play: Snowflakes or Millennials?

Snowflakes or Millennials? Flaky or serious? Careless or full of determination? Attitudes or aptitudes? Well, here’s an interesting study on the younger generation.

“Younger men, ages 21 to 30, exhibited a larger decline in work hours over the last fifteen years than older men or women.” In other words, average hours of labour supplied have fallen for the younger males more than for the older cohorts of workers. Which can be a matter of labour demand (external to workers’ choice) or supply (internal to workers’ choice).

One recent NBER study (see below) claims that “since 2004, time-use data show that younger men distinctly shifted their leisure to video gaming and other recreational computer activities.”

So we have two facts running simultaneously. What about a connection between the two?

“We propose a framework to answer whether improved leisure technology played a role in reducing younger men's labor supply. The starting point is a leisure demand system that parallels that often estimated for consumption expenditures. We show that total leisure demand is especially sensitive to innovations in leisure luxuries, that is, activities that display a disproportionate response to changes in total leisure time.” Economics mumbo jumbo aside, the authors “estimate that gaming/recreational computer use is distinctly a leisure luxury for younger men. Moreover, we calculate that innovations to gaming/recreational computing since 2004 explain on the order of half the increase in leisure for younger men, and predict a decline in market hours of 1.5 to 3.0 percent, which is 38 and 79 percent of the differential decline relative to older men.”

Some data from the study:

So it looks like this data suggests that attitude beats aptitude, and choices we make about our recreational activities do cramp our decisions how much time to devote to paid work.

Full citation: Aguiar, Mark and Bils, Mark and Charles, Kerwin Kofi and Hurst, Erik, Leisure Luxuries and the Labor Supply of Young Men (June 2017). NBER Working Paper No. w23552. Available at SSRN:

16/5/17: Technology: Jobs Displacement v Enhancement

Technological innovation is driving revolutionary changes across the labour markets and more broadly, markets for human capital. These changes are structural, deep and accelerating, and, owing to their nature, are not yet sufficiently understood or researched.

One theoretically plausible aspect of the technological innovation in terms of human capital effects is the expected impact of technology on demand for (and therefore supply of) different occupations. For example, we know that technology can act as a complement to or a substitute for labour.

In the former case, we can expect advancement of technology to create more jobs that are closely linked to enhancing technological innovation, deployment and productivity. In other words, we can expect more geeks. And we can expect - given lags in education and training - that as demand for geeks rises, their wages will rise in the short run before falling rather rapidly in the longer term.

In the latter case, there is a bit less certain, however. Yes, technology’s primary objective is to lower costs of production and increase value added. As a result, it is going to displace vast numbers of workers who can be substituted for via technological innovation. However, not all substitutable workers are made of the same cloth and not all technological innovation is capable of achieving unambiguous returns on investment necessary to sustain it. Take, for example, an expensive robot that costs, say, USD 600.000 a pop, but can only replace 3 lower skilled workers in a laundromat, earning USD16,000 per annum. So with benefits etc factored in, the cost of these 3 workers will be around USD70,000 per annum. It makes absolutely zero sense to replace these workers with new tech at least any time before the tech systems become fully self-replicating and extremely cheap. So, for really lower skills distributions, we can expect that jobs displacement by technology is unlikely to materialise soon. But for mid-range wages, consistent with mid-range skills, there is a stronger case for jobs displacement.

All of which suggests that we are likely to see a U-shaped polarisation process arising when it comes to jobs distribution across the skills segments: higher wage segment rising in total share of employment, as complementarity effects drive jobs creation here; and the lower wage segment also rising in total employment, as robots-induced increase in value added across the economy translates into greater demand for low-skills jobs that cannot be efficiently displaced by technology, yet. In the middle, however, we are likely to witness a cratering of employment. Here, the workers are neither complementary to robots, nor are they earning low enough wages to make expensive robots non-viable as a replacement alternative for labour.

Interestingly, we are already witnessing this trend. In fact, we have been witnessing it since the early 1990s. For example, Harrigan, James and Reshef, Ariell and Toubal, Farid paper titled “The March of the Techies: Technology, Trade, and Job Polarization in France, 1994-2007”, published March 2016, by NBER (NBER Working Paper No. w22110: looked into “employee-firm-level data on the entire private sector from 1994 to 2007” in France.

The authors “show that the labor market in France has polarised: employment shares of high and low wage occupations have grown, while middle wage occupations have shrunk.” So the story is consistent with an emerging U-shaped labour market response to technological innovation on the extensive margin (in headcount terms). And more, the authors also find that inside margin also polarised, as “…the share of hours worked in technology-related occupations ("techies") grew substantially, as did imports and exports.”

However, the authors also look at a deeper relationship between technology and jobs polarisation. In fact, they find that, causally, “polarisation occurred within firms”, but that effect was “…mostly due to changes in the composition of firms (between firms). [And] …firms with more techies in 2002 saw greater polarization, and grew faster, from 2002 to 2007. Offshoring reduced employment growth. Among blue-collar workers in manufacturing, importing caused skill upgrading while exporting caused skill downgrading.”

3/9/16: Innovation policies scorecards: Euro Area and BRIC

An interesting, albeit rather arbitrary (in terms of methodology) assessment matrix for innovation environment rankings across a range of countries, via EU Commission.

Here are the BRIC economies:

All clustered in the “Above Average Harmful Policies” (negative institutional factors) and “Below Average / Average Beneficial Policies” (positive institutional factors). Surprisingly, however, India sports the worst innovation policies environment, followed by China (where “Beneficial Policies” are, of course, skewed by state supports for key sectors). Russia comes in third (where the beneficial policies are most likely skewed to the upside by so-called strategic sectors, also with heavy state involvement). You might laugh, because with Brazil being fourth 'least detrimental' environment for innovation, the EU rankings are clearly at odds with actual innovation outcomes ( where
  • China = rank 29
  • Russia = rank 48
  • Brazil = rank 70
  • India = rank 81

Looking at the contrasting case of key advanced economies with strong supports, one wonders how much of Ireland’s policy environment is due to multinationals’ accommodation and just how on earth can such an ‘innovation-centric’ economy be so ‘average’ in terms of its innovation policies despite hundreds of millions pumped into supporting indigenous innovation. 

Then again, look at Finland with its stellar innovation policies culture and… err… economy in total coma

Makes you think… 

17/4/16: Start Ups, Manufacturing Jobs and Structural Changes in the U.S. Economy

In the forthcoming issue of the Cayman Financial Review I am focusing on the topic of the declining labour productivity in the advanced economies - a worrying trend that has been established since just prior to the onset of the Global Financial Crisis. Another trend, not highlighted by me previously in any detail, but related to the productivity slowdown is the ongoing secular relocation of employment from manufacturing to services. However, the plight of this shift in the U.S. workforce has been centre stage in the U.S. Presidential debates recently (see

An interesting recent paper on the topic, titled “The Role of Start-Ups in Structural Transformation” by Robert C. Dent, Fatih Karahan, Benjamin Pugsley, and Ayşegül Şahin (Federal Reserve Bank of New York Staff Reports, no. 762, January 2016) sheds some light on the ongoing employment shift.

Per authors, “The U.S. economy has been going through a striking structural transformation—the secular reallocation of employment across sectors—over the past several decades. Most notably, the employment share of manufacturing has declined substantially, matched by an increase in the share of services. Despite a large literature studying the causes and consequences of structural transformation, little is known about the dynamics of reallocation of labor from one sector to the other.”

“There are several margins through which a sector could grow and shrink relative to the rest of the economy”:

  1. “…Differences in growth and survival rates of firms across sectors could cause sectoral reallocation of employment”
  2. “…differences in sectors' firm age distribution could affect reallocation since firm age is an important determinant of growth or survival behavior” 
  3. “…the allocation of employment at the entry stage which we refer to as the entry margin could contribute to the gradual shift of employment from one sector to the other.”
  4. “…because the speed at which differences in entry patterns are reflected in employment shares depends on the aggregate entry rate, changes in the latter could affect the extent of structural transformation.”

Factors (1) and (2) above are referenced as “life cycle margins”.

The study “dynamically decomposed the joint evolution of employment across firm age and sector”, focusing on three sectors: manufacturing, retail trade, and services.

Based on data from the Longitudinal Business Database (LBD) and Business Dynamic Statistics (BDS), the authors found that “…at least 50 percent of employment reallocation since 1987 has occurred along the entry margin.” In other words, most of changes in manufacturing jobs ratio to total jobs ratio in the U.S. economy can be accounted for by new firms creation being concentrated outside manufacturing sectors.

Furthermore, “85 percent of the decline in manufacturing employment share is predictable from the average life cycle dynamics and the early 1980s distribution of startup employment across sectors. Further changes over time in the distribution of startup employment away from manufacturing, while having a relatively small effect on manufacturing where entry is less important, explain almost one-third of the increase in the services employment share.”

Again, changed nature of entrepreneurship, as well as in the survival rate of new firms created in the services sector, act as the main determinants of the jobs re-allocation across sectors.

Interestingly, the authors found “…little role for the year-to-year variation in incumbent behavior conditional on firm age in explaining long-term sectoral reallocation.” So legacy firms have little impact on decline in manufacturing sector jobs share, which is not consistent with the commonly advanced thesis that outsourcing of American jobs abroad is the main cause of losses of manufacturing sector jobs share in the economy.

Lastly, the study found that “…a 30-year decline in overall entry (which we refer to as the startup deficit) has a small but growing effect of dampening sectoral reallocation through the entry margin.”

These are pretty striking results.

The idea that the U.S. manufacturing (in terms of the sector importance in the economy and employment) is either in a decline or on a rebound is not as straight forward as some political debates in the U.S. suggest.

Reality is: in order to reverse or at least arrest the decades-long decline of manufacturing jobs fortunes in America, the U.S. needs to boost dramatically capex in the sector, as well as shift the sector toward greater reliance on human capital-complementary technologies. It is a process that combines automation with more design- and specialist/on-specification manufacturing-centric trends, a process that is likely to see accelerated decline in lower skills manufacturing jobs before establishing (hopefully) a rising trend for highly skilled manufacturing jobs.

25/5/15: Immigration and Entrepreneurship: Major Unknowns

A recent CESIfo study looked at the role of immigrants in driving entrepreneurship.

Per authors: "Immigrants are widely perceived as being highly entrepreneurial and important for economic growth and innovation. This is reflected in immigration policies and many developed countries have created special visas and entry requirements in an attempt to attract immigrant entrepreneurs. Not surprisingly, a large body of research on immigrant entrepreneurship has developed over the years."

Couple of interesting statistical summaries:

 Striking feature of the above data is low level of entrepreneurship within Indian and Philippines diasporas.

Key conclusions are: "Overall, much of the existing research points towards positive net contributions by immigrant entrepreneurs. The emerging literature on these contributions as measured by innovations represents the most convincing evidence so far."

Interestingly, distribution of entrepreneurship across educational categories, as exemplified above, is rather uniform, although this does not adjust for quality of entrepreneurship.

Caveats are: "First, there is little evidence in the literature on how much immigrant-owned businesses contribute to job growth. Although data exists on employment among immigrant-owned businesses no data are available showing the dynamics of employment among these firms."

Second, "...immigrant business owners are more likely to export, but we know little about how much they export in total dollars and how many jobs are created by these expanded markets for selling goods and services."

Lastly, there is indeterminacy as to the "....the contribution of immigrant businesses to diversity. Although the contribution of immigrant firms to diverse restaurants, merchandise and services is apparent in any visit to a major U.S. city, we know less about the contribution to diversity in manufacturing and design of innovative products."

Full paper can be read here: Fairlie, Robert W. and Lofstrom, Magnus, Immigration and Entrepreneurship (April 23, 2015). CESifo Working Paper Series No. 5298: