In Part 1 we briefly went through the theory and history of innovation on employment. Then we covered two aspects that affect Bermuda: the pace of change and the occupational risk mix. Today we will look at the implications for Bermuda.

Implications for Bermuda

Are we actually seeing this disruption? Is all this heralded change actually manifesting itself on our island? The short answer is maybe. One will never be able to prove definitely that Bermuda’s job market is succumbing to the “race against the machine”, but some aspects suggest it could be happening. In fact it may eventually lead to monumental change.

One thing to track would be the trend in employment versus production. Nominal GDP per employed worker is hitting new highs while the number of employees continues to fall. More is being done with less. Admittedly this is a crude measure, but it does point to a concerning trend. This is the “efficiency gap”: fewer workers are needed to produce more goods and services. I would suggest this is largely due to technological innovation and global labour arbitrage (potentially due to advancement in telecommunication technologies). Bermuda’s high cost of living has resulted in companies moving lower skilled jobs and some middle management positions to low cost jurisdictions.

Inequality

The economic benefits of recent technological advancements have not been shared widely. Productivity has increased globally but real median wages in various regions of the world (notably the US) have stagnated, leading to a large reduction in labour’s contribution to GDP. The resulting consequence has been the widening gap between the rich and the poor, or inequality. Essentially, this is because capital tends to be concentrated in the hands of the wealthy. In fact a 2013 study by Loukas Karabarbounis and Brent Neiman suggested that 42 out of 59 surveyed countries have actually experienced a fall in labour’s contribution to GDP. It’s worth noting that about half of this decline is the result of the substitution of capital for labour because the latest price has declined relative to the former with advances in technology.

There are no definitive stats on Bermuda’s level of inequality, such as the Gini Coefficient; however we have developed what we feel is a reasonable proxy for what does appear to be a widening gap between the rich and the poor — at least when it comes to income. In taking the highest paying median subset of jobs from the Bermuda Employment Briefs (senior officials and managers) and comparing it to the lowest median income group (service workers and shop and market sales workers) we can see a concerning trend.

Since the recent peak of employment (2008), those with top paying median incomes have seen wages climb nearly in a straight line. The nearly 3 per cent annual advance in median income has kept pace with Bermuda’s consumer price inflation rate which has annualised about the same. The lower tier of median workers, however, has constantly seen lower median wage growth than inflation and even suffered a three-year period of non-existent median income growth.

Although this is only one simple measure, it would suggest empirically, at least, that the gap between the rich and poor has widened. This measure, however, does not take into account capital owned by the wealthy. In Bermuda, the level of capital wealth lost over the last six years may have been disproportionately large, owing to the collapse in real estate prices and local equity shares. It would be incorrect to suggest that the wealthy here have not suffered: they have done so immensely through capital losses in holdings of local real estate and local shares. If, however, they were prudent enough to diversify internationally they may have escaped this devastation of wealth.

While the true level of wealth disparity may be impossible to calculate, it is rather evident that certain higher-level income jobs have not suffered as much as those at risk of automation and computerisation, as discussed previously. As technology continues to advance and capital continues to substitute labour, inequality is likely to only increase with polarisation in relevant jobs and wages. Worker Opportunities

Bermuda is no different from any other nation, neither is it immune to shifting global trends. Bermuda has recently suffered from the offshoring of a whole series of positions, with many in middle management or administration that have been sent to less expensive or more productive jurisdictions. This has been assisted, in a large part, by enhanced global communications, technology and computing power.

The sheer expense of living in Bermuda has made many such positions obsolete and uncompetitive. In a business, quite simply, labour competes with capital. The higher the cost of labour, the more attractive capital investments in productivity (ie, robots, machines etc) becomes. Labour may have little in the way of upfront costs, but does have relatively large, ongoing, hourly costs associated with wages and benefits. In other words, when a manufacturer hires an assembly-line worker, there is typically no large upfront cost to “acquire” the employee, as they only need to pay him or her on an hourly basis for when that employee performs work (excluding any union contract issues, of course). In contrast, technology has high upfront acquisition costs, but relatively low ongoing, variable costs (energy, maintenance, and depreciation).

Unfortunately, Bermuda is not benefiting from the new jobs that are often created by innovation and progression. Secretaries and admin positions have shrunk, but we do not see a wave of computer programmers and web designers popping up locally. This pressure on job creation is not likely to be alleviated anytime soon because we do not have any major industrial sources of jobs for which these forces will benefit and create jobs.

Our bigger concern is that offshoring is only a weigh station on the road to full automation. Innovation is great news for the human experiment and for the privileged minority in developing countries ... but it could be terrible news for the vast number of people in Bermuda who do not have the skills to participate in this new economy. Without a focus on developing newer industries on the Island in the areas of “STEM” (science, technology, engineering and math) or “BRAIN” (Biotech, Robotics, Artificial Intelligence and Nanotech) industries, it is increasingly likely that Bermuda will miss the train of future job growth.

The past has proven that technological advancement has not actually led to fewer opportunities for workers, as labour’s ability to adopt new skills has almost always proven successful, and workers have transitioned to new industries. As computerisation accelerates and becomes ever more sophisticated, however, this may become increasingly more challenging and the opportunity even smaller.

Winner-Takes-All

One aspect that is likely a major cause of inequality, and which is limiting opportunities for Bermudian workers, is the winner-takes-all phenomenon. The advent of an age where innovation and growth are largely the constructs of information technology has in some ways made it easier to achieve monopolistic market positions. Digital innovators can scale up faster, far cheaper and with fewer workers than many traditional business models. The winners tend to build enormous scale with massive economic moats that stymie start-ups or competitors. Google’s sheer dominance in search is an example. Amazon’s online retail dominance is another, in which their dismissal of near-term profits is blowing up brick-and-mortar stores daily.

As a result, workers win when they are at the winning firm, but if not, they struggle. This is not to say incumbents cannot be unseated — they can, of course; yet the scale effect of the winners makes this more difficult in various industries. Sadly, it is not enough to be in the right industries, but you also have to ensure the ones that you are in are the best. Otherwise, you could run the risk of obsolescence as an effect of hyper-competitive consolidation of value.

Bermuda is no stranger to competitive consolidation — our largest industry — reinsurance — is negotiating through a massive-scale adjustment thanks in no small part to the innovation of the capital markets. Bermuda companies and industries will need to be winners now more than ever.

While we should continue to support our current industries, we will slowly become more irrelevant to the future areas of job growth if we do not push our economy into future areas of progress and diversify away from more stagnant or non-innovative sectors. We must try to develop/attract the winning companies and industries of the future, or accept stagnation and/or low growth in the economy and job market over the long run.

In Part 3 we hope to offer some policy options.

Nathan Kowalski CPA, CA, CFA, CIM is the Chief Financial Officer of Anchor Investment Management Ltd and can be reached at nkowalski@anchor.bm

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