Report on digitalization and the economy published today

What is the effect of digitalization on jobs and the economy? These are question posed in a report presented to the Confederation of Swedish Enterprise today. The author of the report is Mårten Blix, an independent consultant and also former secretary in the previous government’s inquiry “Commission on the Future Challenges for Sweden.”
 
Sweden has a strong standing among the technological leaders in digitalization but other countries are catching up. As one of the few countries in Europe with sound fiscal finances, one danger lies in political complacency. Digitalization presents challenges to the core of the welfare state – the financing of public welfare, income distribution and high levels of employment. Already now, public welfare services are under increasing cost pressures from aging populations. “There is no room to raise taxes if Sweden is to remain competitive,” says Mårten Blix.
 
 “With high taxes on labor and one of the most highly regulated housing markets, there is a risk that new jobs and services will grow too slowly and that people cannot move to where the jobs are. Job automation and transfer of tasks to the cloud will put increasing pressures on a tax base in large part based on labor income,” says Mårten Blix. Moreover, the highly regulated labor market with high entry barriers makes it difficult for unskilled workers to get jobs. As the work force ages, life-long learning will be a key ingredient to retain competitiveness. The rise of the sharing economy will also help provide flexibility of work and better use of resources.
 
Many OECD-countries have experienced shrinking middle classes with increased polarization, partly driven by technology. Sweden differs in this development in that the shares of lower paid job have remained about the same while the higher paid jobs have increased. “Digitalization may bring job and wage polarization also to Sweden in the years ahead,” says Mårten Blix. “There is nothing inevitable how well the welfare state will cope with digitalization and the outcomes will depend on the choices of political institutions.”
 
“The risks associated with freelance work should also be addressed in the social security systems, not by according employment status but by reducing the inherent asymmetries that favor employees over the self-employed,” says Mårten Blix. “The biggest danger now is a protectionist response or a policy of ‘muddling through’. If the legal and regulatory obstacles are not addressed, the benefits of digitalization will be slower in coming while the negative labor market effects may be real enough. The results would be worse on all fronts: slower productivity growth, higher risks of technological unemployment, and rising inequality.”
 
In the report, some specific policies are proposed that would help smooth adjustment in the labor market and help realize the benefits of digitalization:

• Lower the tax on (human) labor. High taxes on labor in Sweden further strengthen the already strong incentive to automate tasks. Tax deductions for household services should be expanded.
• Ease the regulatory uncertainty that surrounds the sharing economy. This will provide flexibility for adjustment and lower risks of higher structural unemployment.
• Improve opportunities for lifelong learning. Longer working lives combined with rapid technological change increase the risk that some skills will reach their best-before date earlier than before. To reduce the risk of poor prospects in the labor market, updated skills will be crucial.
• Reduce the asymmetry in social security between being employed or working freelance.

 
About the author:
Mårten Blix has PhD in Economics from Stockholm University and an MSc in Econometrics and Mathematical Economics from the London School of Economics. He has held several senior positions in the Swedish Ministry of Finance, the Ministry of Industry and also at the Swedish Central Bank (the Riksbank). He was also secretary in the previous government’s “Commission on the Future Challenges of Sweden,” in which he wrote a report for the Prime Minister on “Future Welfare and the ageing population.” He is now an independent consultant and guest researcher at the Research Institute for Industrial Economics in Sweden, www.ifn.se. He is currently working on a book on “Digitalization and Challenges for the Welfare State.”

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