A century ago, an ambassador to a distant nation would operate as a ‘viceroy,’ empowered to make decisions up to matters of war and peace. Declines in communication costs have transformed this once powerful office into a glorified sales position, requiring attendance at parties but no decisions of import.
The same ICT revolution that de-fanged the occupation of ambassador has been a godsend for others. The last time you visited your physician’s practice you may have been surprised that no doctor actually dealt with your complaint – instead you were diagnosed by a nurse practitioner. Thanks to the ICT revolution, a nurse can diagnose a vast number of complaints that previously required a trained doctor.
How do the same technologies that hurt one job help the other? Are we talking about the same technology? If it empowers individuals such as nurses or machine operators, how does it eliminate an ambassador’s ability to make decisions?
The Janus-headed nature of new technologies
Economists have studied the impact of ‘computers’ as a single technology (e.g. Autor et al. 2003). Garicano (2000) and Garicano and Rossi-Hansberg (2006) show that it is necessary to disaggregate the components of ICT in order to understand their impact on organisational structure and wages. They analyse separately the effects of ICT technology on the cost of:
- Accessing information stored in machines, and
- Communicating information between individuals.
Reductions in the cost of accessing information are a decentralising force, allowing frontline workers to solve more problems and rely less on the training of specialists. Thanks to databases like LexisNexis, a freshly minted lawyer can search the cases relevant to her client without consulting senior partners.
On the other hand we expect improvements in communication technology to be a centralising force. If people can communicate more cheaply, they will rely more on the help of others and do less themselves. Individuals will specialise further, and production workers will see the knowledge content of their work decrease. Individuals will learn less and ask for more help and directions. In particular, front line people will rely more on headquarters.
The impact of these two changes on wage inequality will be consequently different. Consider an individual in the production floor. When information access is cheaper, he solves more problems and his time is worth more. On the other hand, when communication is cheaper he relies more on others and he becomes more of a ‘machine’ who executes tasks mindlessly – his time is worth less.
Thus understanding the impact of technology on inequality requires understanding who is winning this race between information technology and communication technology. So how can we actually observe and separate these two different impacts?
Confronting theory with data
In our recent work we seek to separate these effects using firm-level survey data on autonomy and new technologies (Bloom, Garicano, Sadun and Van Reenen 2013). We have information on the autonomy of the plant manager compared to the CEO over key decisions on investment, hiring, sales and innovation, as well as his span of control. We also observe the power production workers have compared to plant managers over the tasks they do and their pace of work.
We explore the impact of different types of technology on decision making within a firm. The idea is that more information technology increases autonomy whereas with more communication technology autonomy will decrease. We look at two indicators of information technologies:
- Enterprise Resource Planning (ERP), and
- Computer Assisted Design/Computer Assisted Manufacturing (CAD/CAM).
ERP – such as Germany’s SAP – are software applications that allow firms to store, retrieve and share information on any aspect of production, sales or other firm process in real time. According to our theory, ERP systems reduce the cost of acquiring information. As a result, we expect them to lead to increased decentralisation in favour of local plant managers.
We expect that workers with access to CAD/CAM to be able to solve a wider range of production problems, and therefore have less of a need to run problems by their supervisors. CAD/CAM should increase their autonomy and, by reducing the amount of help they need from plant managers, increase plant managers’ span of control.
A key technological innovation reducing communication costs is the growth of intranets. We expect these to increase centralisation. This will be true for both types of decisions discussed above, so that this technology will affect production workers in the same way as plant managers, with plant-managers making more decisions for workers and headquarters making more decisions for the managers. We test whether the availability of intranets reduced the decision making autonomy in production decisions of workers, and in non-production decisions of managers.
We find that the evidence is strongly supportive of the theory. Information Technologies like ERP and CAD/CAM increased autonomy whereas communication technologies like intranets reduced autonomy. The effects were large in magnitude and robust to using distance from SAP’s headquarters as an exogenous shifter of access to ERP.
What the future holds for workers
Over the next 20 years different jobs will be affected differently by ICT depending on their relative intensity on communication of information. If your job is a travelling sales man or the local head of a multinational, expect it to go the way of the ambassador as more and more of it is done at headquarters. On the other hand, if your job is a nurse, a teaching assistant, or a medical technician, expect information technology to increase the range of what you do, the knowledge content of your job, and its pay and prestige.
Autor, David H., Frank Levy and Richard J.Murnane (2003), “The skill content of recent technological chance: an empirical exploration,” Quarterly Journal of Economics, 118(4), 1279-1333.
Bloom, Nicholas, Luis Garicano, Raffaella Sadun and John Van Reenen (2013) “The distinct effects of Information Technology and Communication Technology on firm organization”, CEPR Discussion Paper DP9762.
Garicano, Luis (2000), "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, 108, 874-904.
Garicano, Luis and Estaban Rossi-Hansberg (2006), "Organization and Inequality in a Knowledge Economy" Quarterly Journal of Economics, 121(4), 1383-435.