The Impact of ICT on Factor and Product Markets

The overall impact of ICT on the macro-economy should not mask the underlying micro-economic mechanisms at work. ICT use has substantial effects on the functioning of product and factor markets.

Financial Markets

Perhaps the most profound effects can be observed in financial markets, as activities in this area are most easily digitized. ICT has allowed the development of expert systems and computer-based trading, and enabled rapid growth in the volumes traded at stock markets. The speed of financial transactions has increased, contributing to greater capital mobility. As in other markets, ICT—and the Internet in particular—has helped to reduce transaction costs. The advent of trading of securities through the Internet may even further lower commissions, and has expanded the range of information and services available to investors, particularly small ones. ICT also affects the banking sector, with a sharp increase in online banking and improved efficiency in some traditional banking functions.

Product Markets

ICTs are profoundly changing the structure and operation of product markets, with overall effects tending to greater international competition, lower margins and prices, greater flexibility at the firm level, and higher productivity. As in financial markets ICTs can reduce transaction costs and the share of intermediation, especially in services such as wholesale and retail trades. However, they may also affect some entertainment, health, and education services that are easily digitized. Evidence to date suggests only limited impacts in these markets because of logistic and regulatory barriers, but these are likely to grow (OECD, 1999). This is accompanied by greater market transparency at lower cost (such as greater search options via the Internet), possibly accelerating the market clearing process.

A major impact of ICTs is that it enhances the possibilities to deregulate markets and introduce competition. IT allows former 'natural monopolies' to be broken up, as has been clearly demonstrated in telecommunications, but also in other industries such as electricity generation and distribution. Entry and market access can be facilitated, as for example in the case where e-commerce reduces barriers to buying and selling in the international market. This further enhances the possibility to deregulate domestic markets, as there is less risk that national monopolies can abuse their dominant position.

Labor Markets

Labor markets are influenced by the spread of ICTs in a variety of ways. There has long been a fierce debate on the impact on overall unemployment, with dire predictions such as that by the cybernetist Robert Weiner in the 1960s ("the advent of computers will make the Great Depression look like a picnic") or pronouncements of "the end of work" (Rifkin, 1995) flatly contradicted by the empirical evidence. Overall unemployment in advanced economies has not shown a significant increase over time that can be clearly traced to ICT, proving that the negative impact of labor-saving technological change associated with ICTs has tended to be compensated by the positive effects on economy-wide productivity and demand from cheaper and better products, and higher investments and profits (OECD, 1996b).

Nevertheless, shifts in aggregate productivity growth might have considerable impacts on unemployment, if real wage aspirations are slow to adjust and the labor market is affected by persistence mechanisms. In a more general sense, the successful adoption of ICT in firms requires significant upskilling of the labor force. ICT has a number of other effects on the labor markets, though, including the increased potential for teleworking, increased market transparency (and effects on labor mobility), and a greater potential for education and lifelong learning.

Skills

One of the most important impacts of ICTs on employment concerns the changing composition of the skill base. Generally, when new technologies are introduced into the production process, demand drops for low-skilled workers and rises for high-skilled workers. Work examining the changing skill composition and the dynamics of upskilling has suggested that in most OECD countries during the 1980s and 1990s, employment grew fastest in high-skilled jobs and slowest—or declined—in low-skilled jobs (Collechia & Papaconstantinou, 1999; OECD, 2002a). While the majority of occupations remain low-skilled (accounting for between two-thirds and three-quarters of the total, depending on the country), the share of high-skilled occupations is steadily rising in all countries.

Overall, most of the shift away from unskilled and towards skilled employment reflects a true upskilling process rather than a change in the industrial composition of economies: shifts have occurred primarily within industries, rather than between them. This is true both in manufacturing and in the services, but particularly in manufacturing.

However, not all ICT-related occupations are high-skill. Also, adoption of ICT at firm level does not necessarily translate into an increase in the economy-wide demand for higher skills. For example, new technologies may replace middle-level managers, who are typically considered high-skilled workers. High-skill ICT workers are nevertheless the most rapidly growing component of high-skilled workers, with—in cases such as Finland—an annual growth rate of almost 50% over the late 1990s period. In the late 1990s, high-skilled ICT workers represented an average of 1.6% in the EU, as compared to about 2.4% in the U.S. Computer workers represent the largest component of high-skilled ICT workers, with the gap in computer workers between northern and southern European countries appearing to be increasing (OECD, 2002a).

More explicit analysis examining the role of technology in explaining upskilling trends has shown human capital to have accumulated faster in those sectors that were more intensive in the use of high-skilled workers at the beginning of the 1980s. Human capital accumulation and innovative efforts can be read as a joint process that reinforces in a cumulative way and can create some phenomena of persistence in industrial performance.