August 8, 2017    7 minute read

Here’s How Artificial Intelligence Will Affect the UK Economy

Managing Disruption    August 8, 2017    7 minute read

Here’s How Artificial Intelligence Will Affect the UK Economy

Nearly 50 years since the IT revolution, the fourth industrial revolution is looming and it will be instigated by Artificial Intelligence (AI). This is the growing phenomenon where machines act like humans. AI can involve analysing large datasets through to automating manual tasks in a factory. Companies such as Facebook are researching ways to help the blind see pictures and Google has a goal to create a self driving car. There is also a plethora of financial startups erupting the market to automise back office operations through to accounting functions.

Now seems like the most prevalent time to question what impact this is going to have on the economy. The Luddite Fallacy for instance advocates that new technology does not lead to higher levels of unemployment, but that the composition of employment within the economy will shift. Is there validity to theories such as the Luddite Fallacy or is the impact of AI going to have much more of a detrimental effect on the economy?

Employment

AI will not only affect low skilled jobs but those higher skilled ones of lawyers and accountants too. Indeed, hundreds of companies within the UK are already using Robotics, but conversely the UK only has a 6.5% chunk of investment within Robotics deal share activity globally, according to CB Insights. Is AI really a cause for concern for employment?

If in fact AI does continue to grow within manufacturing and is further introduced to the services sector, employment could remain stagnant or actually increase. AI requires R&D, programming, maintenance and oversight. These jobs require a spectrum of both low and high-level skilled workers. High skilled workers to work on the development and low skilled workers for day to day operations.

According to the ONS, between June 1978 and March 2017, a period of 30 years where jobs in the manufacturing sector have become more automated, jobs within this sector have fallen from 26.4% to 7.7%. Whilst service jobs have increased from 63.2% to 83.5% in the same period. It will be interesting to see if service jobs face the same fate over the next 30 years.

Avoiding Unemployment

One solution to avoid unemployment in all industries would be training for low skilled workers. This would reduce the impact of frictional unemployment. The age distribution of the UK population will add further pressure to the Government to ensure this is done quickly. The ONS suggests that the over 65 population is forecasted to increase in the next 30 years whilst those aged 16-64 are predicted to decrease. This means fewer working age workers supporting higher numbers in retirement which will squeeze the budget deficit.

AI will lead to goods and services being created more efficiently at a lower cost. Individuals will have higher disposable incomes. This extra income could be injected into other areas of the economy or in further investment which could create jobs in areas where the UK has a competitive advantage. The very resource constrained  NHS could benefit from robotic nurses or doctors. With Brexit looming early next year, there is likely to be a barrier to the free movement of labour. AI could be a blessing in disguise to those low skilled labourers and students  the UK may lose out on.

However, the uncertainty of the political environment with Brexit and the lack of confidence for the Conservatives and Labour must be factored in. This could lead to investment just to keep “the lights switched on” or companies completely leaving the UK. This will either keep employment somewhat stable in the short to medium for the former or actually dramatically reduce it for the latter.

In April of this year, the Government announced the Industrial Strategy Challenge Fund, committing over £1bn over the next 4 years in areas including AI and Robotics, which could boost employment. However, the UK will face steep competition from Japan, the US and will have to inevitably compete with the European Commissions Robotics partnership SPARC once leaving the EU. Brexit will add fuel to the fire over the impact AI will have on employment within the UK and only time will tell.

Equality

PWC recently reported that individuals who have the relevant skill set and the right vocational training will fare well with the eruption of AI . However, the challenge as stated above will be to ensure that those who are less educated are not left behind. There will need to be more incentives for those from poorer backgrounds to attend University or to be provided with relevant vocational training. There has been talk of a Universal Basic Income but the UK government’s finances are highly under pressure in critical areas such as policing and health.

The UK Government must ensure that AI does not widen the already dire inequality statistics within the UK. The Equality Trust has reported that the top 10% earn nine times more than the bottom 10% in the UK. Those with high level skills within the AI industry will reap many of the rewards but in the medium to long term a robot lacks a human brain and oversight will always be needed. Oversight does not make up for lost jobs, but these workers could move  to jobs which still require human intelligence.

Brexit may also lead to many busineeses leaving the UK for Europe or Africa. The UK Government has recently struck a deal with Nissan to remain post Brexit but thousands of other jobs remain on the line. Retail and financial jobs are also highly likely to face automation and this wouldn’t just affect the traditional manufacturing cities of the UK but would lead to more widespread inequality around the UK.

Efficiency

Automation will inevitably lead to economies of scale where more output is produced with lower input and lower associated costs. The production function of economics Y=AF(LK) states that the economies capacity to produce goods depends on Labour (L) and capital (K) multiplied by technological change (A) the main factor behind total factor productivity.

Robert Solow also created a model which states that growth in potential GDP (total factor productivity) = Growth in technology + Growth in labour + Growth in capital. If one accounts for this in per capita terms the equation becomes growth in per capita potential GDP = Growth in technology + Growth in capital to labour ratio. This equation suggests that technology is more important than capital as capital improvements are limited.  The growth in the capital to labour ratio is limited by the weighting of the share of capital in national income. A 1% increase in capital for each worker would increase growth by only 0.4% if that was the share of capital to national income.

Economic theory points to technology growth yielding more benefits than capital and labour growth. However, there are limits. How can Robotics provide human compassion and care? How can a robot in a child ward provide the extra care a nurse would if she senses the child was scared or dealing with an angry customer in hospitality where customers pay for that extra touch? Perhaps the greatest efficiencies will come from the coupling of technology and the human brain.

Conclusion

Artificial Intelligence could prove to be beneficial for the economy but Brexit may limit the upsize potential in regards to uncertainty. Referring back to the Luddite Fallacy, employment has the potential to increase  within the AI industry and the subsequent jobs created from extra demand.

The Government must ensure policies are in place to support low skilled workers and provide the right incentives for companies to stay in the UK. The UK already has one of the highest inequality levels in the developed world and cannot afford to increase this.  With Stephen Hawking suggesting AI as a threat to the human race alongside climate change and overpopulation, developments in this space will be under the close watch of many stakeholders!

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