Creative Destruction and Subjective Well-Being
GAICIL Insights
Ask people how they feel about a churning economy and the answer depends on whether they are looking backward or forward.1 Creative Destruction and Subjective Well-Being, by Philippe Aghion, Ufuk Akcigit, Angus Deaton and Alexandra Roulet, studies how innovation-driven turnover, which brings new products, firms and jobs while destroying old ones, affects how people feel about their lives. The authors build a model of innovation-led growth and unemployment and test it on cross-sectional metropolitan statistical area (MSA) level and individual-level US data.
Something for AI policy to sit with: measure success in life satisfaction as well as GDP. A country that pairs rapid AI adoption with generous transition insurance may find its citizens happier with change than one that adopts slowly and protects poorly.
Predictions and findings line up. Creative destruction's effect on well-being is unambiguously positive when controlling for MSA-level unemployment, less so when not. Job creation raises and job destruction lowers well-being. Creative destruction has a larger positive effect on future well-being than on current well-being. Its effect is more positive in MSAs with faster growing industries or industries less prone to outsourcing, and in states with more generous unemployment insurance. Job creation has a more positive effect on more forward-looking individuals. Churn feels better from the vantage point of tomorrow.
The logic is intuitive. Creative destruction brings growth and new opportunities, raising well-being, especially in anticipation. It also brings job losses that hurt those affected. The balance depends on unemployment and on institutions cushioning job loss. Generous unemployment insurance softens job destruction's sting, letting innovation's positive effects dominate. The safety net converts turbulence into hope.
Extensions beckon: comparing other determinants of well-being with determinants of GDP growth, and examining how individual characteristics and labor market policies beyond unemployment insurance, such as training systems and vocational education, shape the relationship between turnover and well-being.
Now the AI angle. Artificial intelligence makes this paper essential reading. AI is expected to generate significant creative destruction, creating jobs and eliminating others. Public anxiety focuses on destruction. The evidence suggests creative destruction can raise well-being overall, particularly when its effects on future prospects are recognized and institutions cushion job loss. The debate over AI and jobs is also a debate over how people feel, and feelings depend on institutions.
Unemployment insurance is the pivotal lever. Protecting workers during transitions makes innovation's turbulence bearable and lets people seize its opportunities. As AI accelerates turnover, stronger protections may be essential for maintaining public support for innovation and translating its benefits into higher well-being. Generous insurance may be the price of political permission for AI.
The forward-looking result is the subtle gem. Creative destruction lifts future well-being more than current well-being, and job creation benefits forward-looking individuals more. Those who anticipate opportunity gain more from innovation. Policies helping people see and prepare for opportunities, through information, education and training, could amplify AI's well-being gains. Optimism is partly a skill, and it can be supported.
The outsourcing finding shows that the kind of turnover matters. Creative destruction creating local opportunities may enhance well-being more than turnover tied to relocating jobs. As AI transforms industries, the local availability of new opportunities will shape how communities experience change. A job created three time zones away does little for the town that lost one.
Training and vocational education are the natural extension. Systems helping workers move from declining to growing activities could increase the well-being gains from creative destruction. In the AI era, they may be among the most valuable investments societies make.
At bottom, creative destruction can enhance well-being, especially when unemployment is controlled, people look to the future and institutions protect workers. As AI drives a new wave of turnover, social protection and training design will determine whether people experience innovation as opportunity or insecurity. With the right institutions, innovation can make people better off.
Introduction
In this paper we analyze the relationship between turnover-driven growth and subjective well-being. Our model of innovation-led growth and unemployment predicts that: (i) the effect of creative destruction on expected individual welfare should be unambiguously positive if we control for unemployment, less so if we do not; (ii) job creation has a positive and job destruction has a negative impact on well-being; (iii) job destruction has a less negative impact in areas with more generous unemployment insurance policies; and (iv) job creation has a more positive effect on individuals that are more forward-looking. The empirical analysis using cross-sectional MSA (metropolitan statistical area)-level and individual-level data provide empirical support to these predictions. (JEL I31, J63, J65, O33, O38)
Takeaway
In this paper we have analyzed the relationship between turnover-driven growth and subjective wellbeing, using cross-sectional MSA level US data. We have first built a Schumpeterian model of growth and unemployment to make predictions on how job and firm turnover affect wellbeing under various circumstances. Our main empirical findings are consistent with the theory: namely: (i) the effect of creative destruction on wellbeing is unambiguously positive if we control for MSAlevel unemployment, less so if we do not; (ii) creative destruction has a larger positive effect on future wellbeing than on current wellbeing; (iii) creative destruction has a more positive effect on wellbeing in MSAs with faster growing industries or with industries that are less prone to outsourcing; (iv) creative destruction has a more positive effect on wellbeing in MSAs within states with more generous unemployment insurance policies. The analysis in this paper can be extended in several directions. A first avenue would be to use a similar combination of the theory and of cross-section analysis to investigate other potential determinants of wellbeing and compare them with the determinants of (per capita) GDP growth.1
A second extension would be to look at how the relationship between turnover and wellbeing is affected by individual characteristics and by characteristics of labor markets and labor market policy beyond the generosity of unemployment insurance (e.g. training systems, availability of vocational education,..).
Notes
- Philippe Aghion et al., Creative Destruction and Subjective Well-Being, 106 Am. Econ. Rev. 3869 (2016), https://doi.org/10.1257/aer.20150338. Takeaway source: Conclusion, reproduced from a free author or repository copy (working-paper version). ↩
Cite as: Philippe Aghion et al., Creative Destruction and Subjective Well-Being, 106 Am. Econ. Rev. 3869 (2016), https://doi.org/10.1257/aer.20150338
Header image: ALMA assembly work at Rutherford Appleton Laboratory (almauk04rutherfor2).jpg by ALMA (ESO/NAOJ/NRAO), CC BY 4.0, via Wikimedia Commons.
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