Automation and digitisation will threaten the livelihoods of billions of employees. Yet another consequence is less widely discussed: In the Western world at least, automation may mean the end of the welfare state as we know it. Policymakers around the globe are trying to shape its future, whether with a universal basic income, more vocational education, or technological progress.

Many Americans and Europeans fear that digitisation will cause turmoil in labour markets as globalisation did two decades ago. Though technology-driven mass  unemployment may seem unrealistic today, economists observe an increasing polarisation between well-paid, highly-skilled positions and low-paid, precarious occupations.

In most Western nations, taxation systems to finance welfare transfers rely on labour, despite capital-intense production becoming increasingly important. Usually, profits from capital gains are taxed at lower rates than wages.
With automation on the rise, the gap between rich and poor could widen: “More and more income is going to those who have property: physical, financial or intellectual. Less and less income is available for people relying on labour, who already are facing declining real wages,” says Guy Standing, an economist at the University of London.

European utopia

Potential answers for the challenges to come include different tax regimes, which rely more on the gains from capital, sovereign wealth funds to redistribute the gains from automation, or – the best known scheme – a universal basic income (UBI), Standing’s personal favourite.

Standing co-founded the Basic Income Earth Network (BIEN), an association of academics and activists promoting UBI. “Everybody in society deserves to have basic security and conditions where they are sharing a dividend from the collected wealth of past generations, and the resources that belong to all of us,” Standing argues.

Romanticised for a long time as socialist utopianism, UBI is now becoming a mainstream idea. Policymakers in Finland ran a two-year experiment in which 2,000 people received a UBI transfer instead of unemployment benefits. Switzerland’s voters rejected the introduction of a UBI in 2016, although 23% of voters backed the concept. Business leaders including Tesla’s Elon Musk and Siemens’ CEO Joe Kaeser have become advocates for the concept, too.
Standing cherishes the idea’s growing popularity. An older generation of Social Democrats tend to still oppose it, he says. “I think it is because they want a paternal state. I do not believe in paternalism,” Standing says. “I believe in freedom.”

On the other hand, Standing considers entrepreneurs advocating for UBI applause from the wrong quarter. “I worry because I do not want to dismantle the social state,” he says. “We need services, social care, health care – they shape our society.”

Despite its growing recognition, UBI and Standing still face many questions. It remains unclear how it would be financed, and whether every citizen should get the same sum or if a UBI might be based on profession, wealth, age, or citizenship. Potentially, the UBI could be realised as a negative income tax: The transfer would depend on a citizen’s level of income, but lose its universal character.

“A universal system says: We are all part of a community, we all need basic security,” Standing says. Taking care of basic needs would, however, have labour market  implications as well. In several experiments in the US, economists found that cash transfers reduce work effort, at least modestly.

American opportunities

The negative effect on work effort is the main reason why Philippa Malmgren, a robotics entrepreneur and former policy advisor to the White House, opposes the UBI. “We should not pay people not to work,” she says. Malmgren does not believe in the end of work. “We see record numbers in employment everywhere from the US to China.”

Wealth redistribution, whether via UBI or a negative income tax, does not work for her. “We need more growth in the economy which creates more tax revenue and adds jobs,” she says. “Redistribution by itself is not the answer.” To promote growth, she advises policy makers in the West to place more emphasis on smalland medium-sized enterprises, through tax cuts, for example. US data shows that firms with less than 500 employees account for 47.8% of US private-sector employment and 41% of total payroll.

Malmgren argues that university graduates will not be the only ones with jobs in the future. When she tried to hire PhDs for her robotics company, she found they were only able to fly a drone on a computer screen. Building, welding and assembling a physical drone requires employees  with vocational training. Now, Malmgren hires people with experience building toy planes or toy railroad trains. “You do not need artificial intelligence skills to do this.”
Toy trains and drones may be nerdy examples, but there are other blue-collar jobs that are critical for the economy: Garment workers will always be needed, Malmgren claims. “A large problem is we have assumed everybody is going to college and getting a white-collar job,” she says. “But there are many jobs that require more vocational skills. In fact, we have labour shortages in these areas.”

To prepare the welfare state as we know it in Western countries for automation, Malmgren also suggests adjustments. Currently, US insurance and pension funds stick with one company. In the EU, they are non-transferable between member states. “The system would work much better if people could take their insurance with them or could work for five employers part-time,” she says.

AI could actually make welfare systems more efficient. “AI could make government expenditure much more transparent, if not crystal-clear,” Malmgren says. “That will put an end to a lot of unnecessary government spending.”
The downside of governance through AI, however, can be observed in China. With the recently introduced Chinese Social Credit System, every person is awarded a score on social compliance. Looking at pornography or parking illegally lowers scores, and prevents people from obtaining certain permits. It is easy to imagine welfare transfers depending on social compliance. “We have to be very careful about such systems,” Malmgren says. “They could become authoritarian systems in conflict with democracy.” Luckily, China is not the model for Western welfare schemes right now.

After all, short-term labour market and social security reforms in reaction to automation may be modest. If automation causes mass unemployment one day, it may push policy makers to establish a universal basic income – and bid farewell to the welfare state as we know it.