Does digitisation push older workers out the door?

A recent study found that as companies spent big on software, older workers' wages decreased and their exits increased. So what does that mean for employers?

By Rebecca Harris

Published: Dec 23, 2022 11:24:48 AM IST

Updated: Dec 23, 2022 11:28:20 AM IST

While higher software investments are associated with lower exits among workers, as workers age, the effect reverses. Image: Shutterstock

There are few capital investments that send older workers heading for the exits faster than new software. That’s one suggestion from a study co-authored by Kristina McElheran, assistant professor of strategic management at the University of Toronto. Published in the January 2022 issue of the Journal of Econometrics, “Twisting the demand curve: Digitization and the older workforce” notes that by 2019, spending on business software made up 33 per cent of the total share of spending in the U.S., up from five per cent in 1980. This reflects a big shift in investment from machines, typically run by humans, to software programs, which can increasingly automate cognitive work. So, where does that leave humans?

McElheran, along with co-authors Richard Freeman, James C. Davis, and Erling Barth, sought to uncover how workers in different age groups fare as production becomes more digital. Will the digitalization of work be more complementary to tech-savvy younger workers or experienced older ones? To find out, the researchers linked two U.S. Census Bureau data sets spanning 2002 to 2014: one on the software and equipment investments of 50,000 firms, and the other on the wages, job length and demographics of 11.6 million U.S. workers.

The study found that as companies’ investment in software assets increased, the relative wages of workers 50 to 65 gained no ground, and even decreased for those over 65. In contrast, software investments raised the earnings of workers between the ages of 25 to 49, with the bulk of benefits going to the middle of the age distribution (30 to 49).

The investments affected employee retention as well. While higher software investments are associated with lower exits among workers, as workers age, the effect reverses. Older workers switch jobs more and have a relatively higher overall exit as software intensity increases.

“The takeaway is there is an age bias: When firms undergo digital transformations, not everyone benefits equally, and the distribution of that bias seems to be against older workers,” says McElheran. “What we’re finding is what we call ‘skill-biased technical change,’ which is a fancy way of saying workers with the right skills will benefit when these technologies are adopted.”

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Why do workers in the middle benefit the most? McElheran says it points to tacit knowledge and experiences of workers who are perhaps not only comfortable with technology, but also have a sense for how the business and the technology go together. “Otherwise, we would see all of this loading up on the youngest, most teched-up workers,” she says.

For McElheran, it’s not surprising that workers with the right skills are benefitting from their employers’ software investments. The more surprising part is that companies are sharing the gains.

McElheran notes there’s a lot of discussion about the rise of “superstar” firms (such as Google, Microsoft and Apple) that are leading the era of digital transformation, pulling away from their competitors, and grabbing more market share. “There is concern that this will fuel more inequality, but we’re also seeing workers gain in more-digitized firms,” she says. “So, it means these firms are not keeping all of this largesse for the shareholders or executives, but some of these gains are being shared with workers.”

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But this is not just a “Big Tech” story. Companies across sectors are making huge investments in software, and the cloud has only increased the speed and flexibility with which firms access the latest digital tools. The study notes that the vast majority of white-collar workers use software regularly on their jobs, as do an increasing number of blue-collar workers. “Our study has a huge representation of old-school manufacturers as well as all sorts of services firms,” says McElheran. “While it’s not perfect, it’s quite inclusive of the broader economy.”

As the race to digital will only intensify, the question remains: How can organizations better support aging workers? McElheran says the research doesn’t provide specific guidance. However, broader discussions about upskilling and reskilling workers are taking place now.

“If firms want to support and enjoy the productivity of workers with rich, tacit knowledge and experience, they are going to [have to ensure] these digital technologies are accessible to them, and that there is the right training and process design in place,” says McElheran.

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Organizations can also build more diverse teams of people with complementary skills. “The secret sauce is to create the right teams of people whose different skill sets go well together,” she says. “I can’t tell you this from the data, but my impression from talking to managers is that embedding older workers in teams of people who are more tech-savvy but might lack the deep experience or business sense, would be a great way to exploit both the rising technical skills and the evergreen skills.”

Kristina McElheran is an assistant professor of strategy with the department of management at the University of Toronto Scarborough and Rotman. Her research centres on the use of information technology and data by firms, with an emphasis on strategy, organizational design, and process innovation. Her current focus is on data-driven decision making and how firms and individuals can use data to improve their performance. She is also actively investigating the economic and strategic impacts of cloud computing.

This article originally appeared on the Rotman Insights Hub. For more innovative thinking, subscribe to the Rotman Insights Hub newsletter.

[This article has been reprinted, with permission, from Rotman Management, the magazine of the University of Toronto's Rotman School of Management]