How would Automation Impact Employment in the Manufacturing Sector of Bangladesh? An Empirical Projection

The Indian Journal of Labour Economics (2024) 67:1045–1071 https://doi.org/10.1007/s41027-024-00538-w ARTICLE How would Automation Impact Employment in the Manufacturing Sector of Bangladesh? An Empirical Projection Mahtab Uddin1,2,3 · Farhin Islam4 Accepted: 15 November 2024 / Published online: 20 December 2024 © The Author(s) 2024 Abstract Using the two rounds of the Survey of Manufacturing Industries, this paper empirically investigates the likely scenarios of the impacts of technological progress on sectoral employment by divisions in the manufacturing sector in Bangladesh. We performed multiple linear regression of output on labour, capital stock, region fixed effects, year fixed effect, and cluster our robust standard errors at the industrial classification to obtain the Solow residual where the technology parameter comes from the residual of this regression. Then, we introduce advancements in the technology parameter and estimate the impacts on the labour, holding other things fixed. The manufacturing industry in Bangladesh has a total of 5.3 million employees, with the majority in the textile and apparel sector. A 15% increase in productivity due to technological advancement would eliminate 688,000 jobs in Bangladesh, a 30% increase would eliminate 1.22 million, and a 50% increase would result in a dire consequence, with a total job loss of 1.8 million. The largest affected sectors are textiles and apparel. Dhaka would be affected most, followed by Chattogram, Rajshahi, and Khulna. Assuming a 10% annual growth in the industry, the net increase in total manufacturing employment would be 2.02 million in 2025. The unemployment we have forecasted will not occur with the rise in technology if the technology is augmenting instead of labour replacing. Keywords Technology · Automation · Employment · Job loss · Growth · Skill demand JEL Classification J64 · O33 * Mahtab Uddin 1 Global Development Institute, The University of Manchester, Manchester, England 2 Department of Economics, University of Dhaka, Dhaka, Bangladesh 3 South Asian Network on Economic Modeling (SANEM), Dhaka, Bangladesh 4 Bangladesh Institute of Development Studies (BIDS), Dhaka, Bangladesh Vol.:(0123456789) ISLE 1046 The Indian Journal of Labour Economics (2024) 67:1045–1071 1 Introduction While technology has provided several benefits to society, it has also had a negative impact on employment and job opportunities. As technology continues to grow, more and more jobs are being automated, replacing human workers with machines. Technological progress eliminates labour demand for routine tasks while creating new employment for skilled personnel to carry out non-routine cognitive tasks. Developing countries with low-skilled workers will face this challenge more severely than developed countries, where the majority of the labour force is highly skilled. A large and growing labour force, low wages, informal sector dominance, limited education and low skill characterise the labour market in Bangladesh. Technological progress impacts employment in Bangladesh, particularly in the manufacturing sector. The adoption of automation in manufacturing has led to job losses. For example, automated textile machinery has replaced many workers in the country’s large garment industry. It has led to a skills gap in some sectors, as many workers do not have the necessary skills to work with automated machinery. However, technological progress in Bangladesh has helped to flourish sectors like information technology, telecommunication and e-commerce, where new job opportunities can be created if proper policies are undertaken. Despite the importance of the topic in the context of Bangladesh, there is no such study forecasting labour demand through the lens of technological progress to our knowledge. Our study aims to fill this research gap by estimating the impact of different levels of technological shock on the manufacturing employment of different sub-sectors in Bangladesh. Regional disparities are also addressed in the analysis. Therefore, this paper aims to measure the likely impact on employment by sectors and divisions in Bangladesh due to technological progress and automation. The BSIC (Bangladesh Standard Industrial Classification) 4-digit level forecasting analysis will also help to understand which skills will be of more concern if there is no adequate skill upgradation. 2 Literature Review The impact of technology on the labour market is a century-old controversial topic in economic theories. The character and volume of employment have been directly impacted by the introduction of new technology since the Industrial Revolution. Workers have frequently resisted the introduction of new labour-replacing machines in the production process, and some economists have created the term “technological unemployment” to describe this joblessness brought on by new technology. The extent of unemployment and the labour-saving features of technological advancements sparked economists’ interest in researching the relationships between technological change, economic growth, and employment in developed countries. However, it has been less endeavoured in the context of developing countries. ISLE The Indian Journal of Labour Economics (2024) 67:1045–1071 1047 The prevailing perception of innovation as an undifferentiated phenomenon where a mixture of new products and processes, scattered across industries, is supposed to explain economic change has rendered the discussion on the role of technological change in employment inconclusive (Vivarelli & Pianta 2000). The distinction between innovations in products and processes and the uniqueness of industrial sectors are widely ignored. Process innovation entails producing the same amount of output with fewer production variables, mostly labour. However, economic theory has long pointed out the existence of economic forces that might offset—at least partially—the employment loss induced by process innovation. One possible compensation mechanism was argued by Ricardo (1951), which is that new technology can lead to cost reduction and thus increase in profit, which in turn can fuel new investment and create new job opportunities. Say (1964) argued that process innovation, although it displaces workers in the user sectors, can create jobs in the capital sector. Steuart (1966) described another compensation mechanism of process innovation, where innovation decreases price and encourages new demand, which can create additional employment for additional production. However, there is still a point of controversy between ‘pessimistic’ and ‘optimistic’ scholars and commentators regarding compensation mechanisms. Marx (1961) criticised the effectiveness of compensation mechanisms, stressing the profitability of labour-replacing technologies. Pessimistic expectations suggest that the delay in the compensation mechanism can create structural, technological unemployment. Compe (...truncated)