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The Impact of Technological Change on Labor Market in Developing Countries
08. July 2018 at 20:24
The technological advancements and inventions change not only the work processes, but the everyday life too. Because of the increased access to education and opportunities, developed countries are more likely to use modern technology. Those countries can easily adjust the labor market and the whole economy to the changes. On the other hand, developing countries find some difficulties in the process of implementing modern technologies.
Developing countries have problems related to the labor market and it’s adaption to the technological changes, especially because developing countries have high unemployment rates. This paper offers a research of the impact of technological change on the economic growth and unemployment in the developing countries, with particular reference to the Republic of Macedonia.

In many areas the technological change brought positive implications. The technological transformation plays a key role in the economic growth, because making innovations to the production machines, production methods and products in order to increase production volume or efficiency will result with competition advantages and profit increases (Çalışkan, 2015). According to Regalado (2012), the implementation of digital technology is going to cause a massive increases in productivity because of the access to affordable and powerful tools. Increasing the productivity is important for developing countries because it will improve the international export position. Kaldor (1966), claims that the growth of economy is highly related to the manufacturing output, i.e. he claims existence of (long-run) increasing returns.

Despite this huge benefit for the economy, the introduction of IT technologies and digitalization of the manufacturing processes may cause destruction of jobs. A technological innovation has a direct and indirect impact on employment and skills. In particular, technological change allows producing the same amount of goods with a lower quantity of inputs, namely labor and capital (Massa 2015). Additionally, according to the research of Feldmann (2013), a faster technological change is likely to increase unemployment substantially. The adverse effect on unemployment appears to persist for three years and to disappear later on, so the effect is transitory, not permanent. Due to the skill gaps between the labor supply and demand, labor supply cannot adjust to the technological change. Once the reallocation of labor is complete, the unemployment may even fall below that level, because the firms will take a full advantage of their improved international competitiveness. According to Keynes (1930) that is “only a temporary phase of maladjustment”.

Furthermore, due to the lack of education in developing countries, young people cannot be employed in jobs where knowledge about modern technologies is needed. When the technology’s destruction of jobs primarily affects young people, the problem may be both acutely economic and social. The lack of any employment opportunity for young people may cause tremendous disenchantment and frustration, which could lead to social disruption. Additionally, if the countries are facing a population ageing, the use of modern technologies may cause problems for the older employees too (Marchant, Stevens & Hennessy, 2014).

Additionally, problems could arise when nations attempt to make overly rapid advances in education, producing graduates without a satisfactory infrastructure to support the education system. Namely, families must be able to afford to send their children to school, educational institutions need resources such as current textbooks and electricity, and educated individuals require incentives to remain in their home nations. Developed nations must moderate their influence because rapid changes lead to destabilization and cause more problems than they solve (Cackler, Gu and Rodgers, 2008).

Glass (2008), claims that the developing countries should focus on attracting foreign companies with high technologies than investing in domestic companies with low technologies. The knowledge and technology spillovers can strengthen developing countries and help them to increase the competitiveness. Because of this, it is clear that the technology changes and education reforms in developing countries, should be made only in cooperation with the developed countries.

Republic of Macedonia is a developing country that has a great potential for growth and progress. The average growth in the past five years has reached 2.5%, which is more than the regional average of 1.9%, but despite the progress and economic development, further efforts in several sectors are still needed (World Bank, Country Context of FYR Macedonia, 2017).

In the last ten years the unemployment rate had downward trend because of the increase of foreign direct investments. The corporate tax rates were cut to 10%, which is lower than the average of 21.51% in European countries. Because of the ultra-low corporate tax rates, more than 30 companies in the last ten years invested in Macedonia. In 2016 the highest value of investments were made in manufacturing industry, 27.86% of the total investments. This shows that the highest investments in Macedonia are associated with job places that require low-skilled workforce.

Despite the unemployment reduction in the last ten years, the unemployment rate is still high and in 2016 amounted 23.7% (State Statistical Office of the Republic of Macedonia). This rate is higher than the Southern Europe’s average rate of 15.8% and EU 28 average rate of 8.5% (International Labour Organization). The unemployment rate in Macedonia is characterized by long-term, high rates that are a consequence of the transition and privatization periods. The imbalance on the labor market has contributed to the lack of trained staff in certain sectors, like technology industries, and a surplus in the sectors which require lower qualifications, and this trend is expected to continue. (Jorgensen and Shkaratan, 2014).

As Macedonia is characterized by structural unemployment, the intensive introduction of modern technologies in order to boost the economic growth may increase the labor gap. Moreover, introduction of modern technology may cause problems for elderly workers, as the population is ageing.

On the other hand, as the foreign direct investments are increasing, they can be the main channel through which Macedonia can increase the use of modern technologies and the international competitiveness. Macedonia should therefore take this opportunity seriously, mostly due to the fact that Macedonia has a technological lag.

The first step that should be taken over, is attracting foreign investments that in the next years will lead the country upward away from the production and export base of garments, textiles, motor vehicles and construction, as it was done by Costa Rica. This can increase training programs for IT workers, supervisors, engineers and managers (Moran, 2015). This is especially important for young people that are not interested in working in production processes, but in IT industry.

Similar example for changing the investment policies is China. In the early 1990s much of the foreign investment was in relatively low technology, labor intensive, operations that took advantage of China’s low wage costs, but in 1998 with the change of the investment policies most of foreign industries are engaged in high technology sectors (Lemma, 2014).

Second measure that has to be implemented is an education reform. Taking into account the fact that young people in the developing countries have difficulties to afford supplementary training or studying abroad, the access to higher education must be at the center of the economic policies. Increasing the access of high-level education can be provided by financial assistance of the Government. The financial assistance should be considered as training grants or career development loans, which will obligate the beneficiaries to work in a local company after the completion of their education.

On the other hand, as it was before explained, rapid changes in education can lead to destabilization, so the reforms, can be useful only if they are implemented with cooperation with the developed countries. As an example, in Malaysia training institutes are established by joint interaction with the Government and the foreign investors (Lemma, 2014).

Finally, policymakers in Macedonia should encourage young people to self-employ, by access to education, grants or financial support. Small local businesses can become very successful if young entrepreneurs take advantage of all the opportunities that modern technologies can offer. Young people should be more innovative and focus on businesses related to the IT sector. For example, they can invest in business related to Video Production, Web Design, IT support, Online Consulting, Online Marketing, App Development Service, E-Library, and Ecommerce Platforms etc. This business can be very challenging and attractive to young people because of the global access, cost savings, outsourcing services, flexibility, faster service and most importantly high productivity.

Besides the effect on the unemployment rate, new entrepreneurships can cause a positive impact on competitiveness and economic growth in a number of ways, as creating knowledge spillovers, increasing competition by augmenting the number of enterprises and by providing diversity among firms (Audretsch & Thurik, 2004). Another evidence that the increased entrepreneurial activity may positively influence the whole economy, is elaborated by Acs and Audretsch (2003), Nickell et al. (1997) and Picot et al. (1998).

As a developing country, Macedonia has a potential for higher economic growth, which will positively affect the social and economic life of the citizens. The main challenge of the policy makers is to increase the use of high technology and to reduce the unemployment among young people, which will contribute to the technological and economic development of the country.
Introducing high technology in this country can be crucial for productivity and international competitiveness.

On short term the technology spillover should be intense in IT industry. Increased investments in IT-oriented businesses can motivate young people and reduce the unemployment. The priority is to improve the level of education among young people and to encourage them to open their own technology-oriented businesses. Young people are the future and prosperity of this country and because of that, the involvement of the Government and the private sector should be intense and focused on them.

The most important thing is that, each reform that is suggested should be made in cooperation with the developed countries. Only in that situation the technology spillover will contribute to the economy growth and competitiveness, without unbalancing the labor market i.e. without causing “technological unemployment”.
Cite This Article As: Simona Kovachevska. "The Impact of Technological Change on Labor Market in Developing Countries." International Youth Journal, 08. July 2018.

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