Advances in technology impact value of workers’ skills

It is no secret that advances in technology can greatly impact the value of workers’ skills. Older workers often find the updating of complex technology uneconomic, while younger workers acquire and readily employ skills tailored to the newest technology. The result: the latter group’s productivity rises, diminishing the value of output produced by their older counterparts. A recently published study by Glenn MacDonald, Washington University’s John M. Olin Distinguished Professor of Economics and Strategy, is the first to model and explain the nature and severity of this effect.

The paper, “The Economics of Has-beens,” co-authored by Professor Michael S. Weisbach of the University of Illinois at Urbana-Champaign, appears in the February 2004 Journal of Political Economy. In the study, the researchers argue that while experience may offer the older worker a certain amount of income protection, technology advances “always turn them into has-beens to some degree.” Unless older workers have a special advantage in updating their skills, emerging technologies will tend to depreciate those skills. This is because younger, more currently trained workers enter the market and drive down the price of whatever services the old and young provide. For the young, whose high-tech know-how allows them to provide a high volume of such services, this price reduction is not a concern. But the old, whose productivity is tied to older technology, pay a price: the overall effect creates downward pressure on their income.

Glenn MacDonald
Glenn MacDonald

MacDonald’s research explores a model of young workers considering which skills to accumulate while acknowledging that in the future, they will be older workers who have to deal with the emergence of new technology requiring newer skills. Several aspects of the economy turn out to be crucial to such a decision. One such aspect—elasticity of demand—describes how much the price of a service has to fall for buyers to absorb an increase in a given quantity of a service. When elasticity of demand for workers’ services is low, the increased volume of services the young can provide with their up-to-date skills depresses the price of their services, but the high volume of services they provide maintains or increases their income. Not so for older workers. The has-beens effect is severe.

Architecture is an industry that illustrates this phenomenon. The demand for architectural services comes almost exclusively from residential or commercial construction, where a reduction in the price of architectural services does not greatly expand the use of those services. Since older architects have found great difficulty in acquiring the new computer-aided design (CAD) and computation-intensive skills, this new technology has allowed a comparatively small number of younger, highly productive architects to take over much of the market, causing most of the older generation to become has-beens. In fact, the effect that MacDonald has observed is so pronounced that the average older architect actually earns less than the typical younger, less experienced colleague.

The nature of technological change within an industry—whether or not advances are expected to be persistent—further impacts the severity of the has-beens effect. When current innovations in technology suggest even greater advances in the future, the young anticipate the has-been effect, with fewer choosing to enter the industry.

“Intuitively, the young appreciate that technology is likely to continue to advance and so cause the supply of services to be substantial in the future, resulting in a low future price for their services, and low future income for them,” MacDonald says. “Likewise, when significant advances tend not to be repeated, the young anticipate that technology is unlikely to have advanced further when they are old.” In other words, young, forward-looking workers will try to enter fields in which current technological changes give them an advantage, but to avoid fields in which future advances are likely to make their own current skills obsolete.

MacDonald first became interested in this phenomenon while consulting with Eastman Kodak. Through the 1990s, he saw firsthand how the technology shift from analog to digital image processing produced a devastating effect on the company. Today, Xerox is facing a similar challenge as the most current approaches to reproduction, storage, and document dissemination are based on networked printers rather than stand-alone photocopiers.

MacDonald says that his research is applicable to a wide range of industries. “The model can be applied wherever people invest in skills that are tied to technology and not easily updated.” The model applies even in fields not normally associated with changing technology, such as economics.

“In academics, we make huge investments in particular tools and approaches,” MacDonald notes. “And when we invent a new idea, it improves our performance but does not expand our industry very much. Economists, for example, have done incredibly well over the past 50 years in applying cutting-edge theory and empirical work to revolutionize the understanding of the limits of economic policy, and have taken over topics traditionally pursued in other ways, e.g., fertility and family structure; but there are not that many more economists. The young dominate, and the has-beens effect is huge.”

The implications of the model for young people choosing future careers, then, are especially important. Students should consider whether the technology in their chosen field is fluid or static, whether any recent improvements are likely to be repeated soon, or whether big advances are rarer, according to MacDonald, because this will have a big impact on their future income. Whether skills can be readily updated or applied in other occupations is also important.

Companies must also consider the implications of employees’ investments in technology-specific skill sets. The researchers concluded: “A technological shift that makes obsolete the human capital of most of the workers leaves the firm with the unenviable choice of proceeding with the same work force against competitors trained in the better technology, or laying off workers, breaking implicit promises to them, and living with the ensuing reputational damage.”