International business economics THE IMPACT OF DIGITAL ECONOMY ON THE LABOR FORCE

FOREIGN TRADE UNIVERSITY ECONOMICS AND INTERNATIONAL BUSINESS DEPARTMENT   International Business Economics THE IMPACT OF DIGITAL ECONOMY ON THE LABOR FORCE Nguyễn Phương Hoa 2012150034 Đỗ Quỳnh[.]

FOREIGN TRADE UNIVERSITY

ECONOMICS AND INTERNATIONAL BUSINESS

DEPARTMENT

 _ _

International Business Economics

THE IMPACT OF DIGITAL ECONOMY ON

THE LABOR FORCE

Nguyễn Phương Hoa- 2012150034

Đỗ Quỳnh Chi- 2012150014 Đại Thị Tuyết Chinh- 2014150206 Class: KTEE308.2- K59

Lecturer: Nguyễn Bình Dương

TABLE OF CONTENTS

1.Theoretical background 4

1.1 Digital economy and Digital Transformation Key Concepts and Definition 4

1.2.Analysis of current state 5

2 Methodology 6

3 Impact of digital economy on the labor force 7

3.1 Opportunities 7

3.1.1 Productivity enhancement 7

3.1.2 New job opportunities 9

3.2 Challenges 10

3.2.1 Job displacement/ Sectoral shift 10

3.2.2 Requirements for reskilling, upskilling, and soft sills; higher adaptability and flexibility 13

3.2.3.Income inequality/ wage polarization 14

4 Policy implications 15

4.1 Implications for employment policies 15

4.2 Implications for skills policies 15

5 Conclusion 16

AbtractThis paper looks to understand the two-fold impact of digital economy on labor marketoutcomes, based on existing literature and data from World Bank, EuropeanCommission, OECD, et cetera In recent years, the digital economy has achieved rapiddevelopment, especially playing an irreplaceable role in increasing productivity,creating new job opportunities, and adjusting employment structure Since digitaltechnologies enable the production of more goods and services with less labour, theyexpose some workers to the risk of unemployment or lower wages They also result inthe requirements for upskilling, with implications for the capability of existing policiesand programmes to ensure employment and skills development To take advantage ofthe adoption of technology, the government will need to focus on policies to fostergrowth and employment in new economic activities enabled by digital technologies.

IntroductionThe fourth industrial revolution (4IR), also known as industry 4.0, is upon us Therapid advancement of new emerging technologies and the escalation in technologyusage is altering our society and penetrating every sector of the economy Continuoustechnological development is an essential condition for companies to maintain theircompetitive advantage This technological development can be examined via theexample of earlier industrial revolutions However, the most significant technologicaland labor market turnaround were brought about by the third and fourth industrialrevolutions, whereby computer-controlled automation was replaced by the digitaltransformation of the fourth industrial revolution, wherein devices communicateautonomously along the value chain The spread of automation, robotics,digitalization, and the use of virtual autonomous systems has already led to an analysis

of the impact on the workforce by many researchers

According to research on this topic, automation and digitalization are some of the mostrelevant labor market topics today, as the technological revolution brings aboutsignificant employment changes, the replacement of human work by robotics, and theneed for workers and companies to adapt to changing conditions, as well as its socialand economic impacts Technological development enables networked machines,computers and algorithms to take over considerable parts of work currently done byhumans It transforms the tasks needed to be performed to complete the work and thework processes A demand for new work that has never been needed before is beingcreated Therefore, workers need to improve and change themselves to adapt to thedigital area Additionally, job transformation will likely lead to an increase in incomeinequality among different categories of employees

The goal of this study is to investigate the effects on the labor market of digitalizationbased on existing studies Digitalization and the use of industrial robots arewidespread; however, opinions are divided on their mass appearance, and the extent oftheir effects on employees and jobs On the one hand, digitalization stimulates furtherdevelopment, demanding more innovative approaches in order to be capable ofactively participating and shaping the digital transformation It influences theexpectations for the competencies of both the employers and employees Hence,productivity will increase significantly On the other hand, the projections on thefuture demand for knowledge and skills reveal that digital technology is more likely todisplace primarily routinized work than low-skilled work, and therefore can be the firstrevolution that takes away middle-class jobs Consequently, it can lead to the point

less safely, are left for humans Workers will need to improve their capabilities orswitch to another jobs This requires flexibility and adaptability of each individual Forthose aforementioned difficulties, to successfully overcome the challenges created bydigitalization in the labor force, policies of the government and programs are essential.

1 THEORETICAL BACKGROUND

1.1 Digital economy and Digital Transformation Key Concepts and Definition

There is no common agreed definitions of digital sector, products, or transactions, letalone the digital economy (IMF, 2018) The “digital economy” is sometimes definednarrowly as online platforms, and activities that owe their existence to such platforms,yet, in a broad sense, all activities that use digitized data are part of the digitaleconomy: in modern economies, the entire economy As highlighted by UNCTAD(2017), the evolving digital economy can be associated with an increased use ofadvanced robotics, AI, the Internet of Things (IoT), cloud computing, big dataanalytics and three-dimensional (3D) printing

“Digitalization” is defined as a process that digital technologies, services, products,techniques, and skills are diffusing across economies, and businesses make use ofthese factors (Brennen and Kreiss, 2014)

Under the study entitled “Vietnam Today: The First Report of Vietnam’s FutureDigital Economy Project” implemented under the partnership of the Ministry ofScience and Technology and the Australian Government, the following broaddefinition is used: “Digital economy is all businesses and services that have a businessmodel based primarily on selling or servicing digital goods and services or theirsupporting equipment and infrastructure.”

In the EU, the Strategic plan 2016-2020 – Communications Networks, Content andTechnology of the DG Connect articulates the aims of “creating a Digital SingleMarket for more growth and jobs, where citizens, businesses, and publicadministrations can seamlessly and fairly access and provide digital goods, content andservices”

Digital transformation is defined as “a process that aims to improve an entity bytriggering significant changes to its properties through combinations of information,computing, communication, and connectivity technologies” (Vial, Gregory, 2019).Digital transformation is essential to all businesses, regardless of size and industry.Digital transformation describes the practice of business organizations usingtechnology to optimize their current processes and enhancing customer experience - inorder to stay competitive and relevant in the new customer-centric economy

Yet, digital transformation is more than just simply installing new software or moving

to the cloud - digital transformation, at its core, is all about business, and requiresbusiness expertise and involvement from business users Even though digitaltransformation is driven by an everchanging customer expectations in a new businesslandscape that is highly connected and digital savvy, simply executing transformationwith just technology alone is inadequate Digital transformation requires the right mix

of business and digital expertise to make the whole endeavor a success

1.2 Analysis of current state

Automation as a part of digital transformation of businesses is a critical and one of themost important issue which will be affecting the labor market in the near future (Goos2018) As we can see in the figure 1 and according to the OECD publication “JobCreation and Local Economic Development” (2018) at the beginning of the century,

100 000 industrial robots were delivered to the businesses each year across the world

By the 2016 this number has reached 300 000 annually

Figure 1: worldwide annual supply of robot in OECD countriesBased upon this, the aggregate pattern is reflected in an increase in the use of robots inseveral OECD countries Many economic models predict that increasing digitalizationand a growing use of industrial robots will lead to higher labor productivity growth.Some workers will benefit from new technology that makes their jobs more pleasantand leads to rising wages Other workers will struggle to adapt to the new environmentand will face job losses This means that the importance of some jobs will decline andgradually such job positions will disappear and, on the contrary the importance ofsome jobs will increase significantly

With the widespread adoption of Wi-Fi, connecting devices to an Internet connectionhas become quite simple And now, practical appliances such as your television, coffeemaker and refrigerator can all be a part of the IoT However, the practical implication

of IoT technology goes far beyond the home Within the next two years, it’s projectedthere will be four IoT devices for every human being which means more than 24billion IoT devices across the globe

Research on the impact of AI within the workforce presents two polarizing viewpoints.It’s seen as extremely beneficial in efficiency But at the same time it’s believed to bethe biggest employment disruption since the last Industrial Revolution GeorgiosPetropoulos, an industrial organization researcher, outlined what roles he believes to

be most directly impacted He argues that mid-level jobs requiring routine manualskills are at risk The author argues that in the long run, initial labor displacementeffects of jobs with routinized manual or cognitive skills, as in previous industrialrevolutions, will be compensated for by the growth in non-routine jobs at the high andlow end of the economy (Georgios Petropoulos, 2018)

During the COVID pandemic the use of digital technologies has skyrocketed and with

it Artificial Intelligence is taking a very prominent role According to the data from theMcKinsey Global Institute, AI can potentially add 16% to the global economy by 2030and boost the global gross domestic product GDP up to 26%

2020 is the year that moved AI out of the corners and into the mainstream The "earlyadopter" advantage is petering out, with a Deloitte survey revealing that only 27% ofenterprises now rank as "starters" in terms of AI adoption, while 47% are considered

"skilled" and 26% "seasoned." 71% of participants plan to increase their investment in

2021, and the IDC forecasts that AI spending will grow to $97.9 billion by 2023, 2.5times that of 2019 (Ofer Razon, 2021)

As AI becomes ubiquitous, the most mature organizations are looking for more usecases While AI is still primarily utilized for IT, cybersecurity, and engineering andproduction, it's seeping into more business-critical functions like marketing, legal, HRand procurement (Ofer Razon, 2021)

Advanced enterprises are moving on from using AI to automate processes andoptimize efficiency and are becoming more creative AI is slowly being used todevelop new products and services, with seasoned adopters rating this as the secondmost desired outcome, while starter adopters still rank it a distant fourth (Ofer Razon,2021)

2 METHODOLOGY

The aim of the paper is to analyze, define and characterize the impact of digitaltechnologies on the labor market In order to achieve this goal, at the introduction wedefined the context in which the subject was dealt with As part of the analysis of thecurrent state, we applied secondary research, which consisted of data collection andprocessing methods and their subsequent analysis and synthesis The main sources ofrealized secondary research are the publications of foreign authors and research reportsfrom the OECD and the World Economic Forum

In the research, we conducted, we examined the correlation and the trend between theselected data we obtained from the OECD (2018) statistical databases and which wealso used to analyze the current state Data of employment and unemployment arefrom year 2013, same as data on jobs with high risk automation which are from year

2013 Countries whose data we taken into account are: Austria, Belgium, Canada,Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Ireland,Israel, Italy, Japan, Korea, Lithuania, Netherlands, New Zealand, Norway, Poland,Slovak Republic, Slovenia, Spain, Sweden, Turkey, United Kingdom an United States.The research is dedicated to characterizing trends that may have an impact on the labormarket

3 IMPACT OF DIGITAL ECONOMY ON THE LABOR FORCE

3.1 Opportunities

3.1.1 Productivity enhancement

Digital transformation creates an opportunity for improving productivity growth byenabling innovation and reducing the costs of a range of business processes Yet, overthe past decade, there is a negative correlation between the growth of digitaltechnologies and productivity (OECD, 2019)

Figure 2: Productivity growth across OCED countriesHowever, OECD work shows a hope for the future Although not yet showing up inthe aggregate productivity data, digital transformation is starting to have impacts onproductivity in individual firms and certain industries as well Further and largerimpacts are expected to evolve alongside with the evolution of digital transformationand digital technologies (OECD, 2019).

Figure 3: Firm productivity supported by adoption of digital technologies

(Annual gain in multifactor productivity associated with technology adoption (average

EU firm)

Figure 4: Digitalization impact on industry productivity(1 Data are from six OECD countries: Australia, Germany, Norway, Sweden, theU.K., and the U.S This data is based on a 10 percent increase in digitization

2 Services refers to overall services other than financial services.)

Another case in Vietnam, according to a publication titled "Annual Vietnam EconomicReview: Improving Labor Productivity in the Digital Economy" published by theNational Economics University (NEU) in 2019, the digital economy can contributebetween 7% and 16.5 percent to the overall growth rate of labor productivity each yearfrom 2020 to 2030 The digital economy makes a significant contribution to the overalleconomy's productivity and efficiency, and it provides a new driving force for rapidincreases in labor productivity According to the report, the digital economy has thegreatest impact on labor productivity in the fields of science and technology, financial

- banking activities and insurance, real estate, and ICT, while having the least impact

in agriculture, forestry, and fisheries, and a minor impact in processing andmanufacturing.

3.1.2 New job opportunities

Digitalization has proved to create new job opportunities for the labor force Despiteautomation, the demand for work and workers could increase as economies grow,partly fueled by productivity growth enabled by technological progress (Mc Kinsey2017)

Figure 5: Digitization’s regional impact on GDP and jobs in 2016

However, this positive employment impact is statistically significant only in high- andmedium-tech manufacturing sectors, while irrelevant in low-tech manufacturing and inservices (Vincent Van Roy, Dániel Vértesy, Marco Vivarelli 2018) Strongemployment growth in digital industries like Internet, Computer and NetworkSecurity, and Computer Software industries in the last years is experienced amongcountries across the development spectrum and geographic locations(World Bank2018)