AI: The Changing Face of Division of Labour

If you don’t have strategy, you’re part of somebody else’s strategy ... if we do not change the future, we shall be compelled to endure it. - Alvin Toffler

Earlier this month, Microsoft laid off 6,000 employees, about 3% of its workforce. Intel has revealed plans to dismiss 21,000 employees - approximately 20% of its global workforce. Just a few days back, Tata Consultancy Services has decided to trim its workforce by around 12,000 people. Somehow, all these layoffs seem to be connected to the ubiquitous artificial intelligence (AI).

Does this represent a global shift in division of labor induced by AI? If so, what are its implications for India?

Adam Smith, David Ricardo, and Karl Marx intensively studied the old division of labor. Smith’s 1776 treatise made the first major attempt to examine the potential for the complex division of labor. Smith argued that artisan skills were being replaced by a division of labor where the production process was segregated into compartments, each one performing different tasks, with varying rates of wages (and profits). Productivity gains were the result of specialization in one single function. Using pin-making as an example, Smith explained that by dividing the production and assigning different tasks to different workers, each worker fully develops the special skills required to complete a task.

The New International division of Labor theory (NIDL) developed by Frobel and others, is a theory of international mobility of capital and multinational subdivision of production. First, with the availability of a large pool of low wage workers from low-income countries, goods can be produced at lower costs. Second, progress in manufacturing technology, the modernization of communications, and advances in transportation have permitted an international vertical fragmentation of production in which firms undertake different phases of production in different nations.

Moreover, the decomposition of production processes, or the ability to assemble and produce subcomponents without requiring high skill level, has allowed production to be performed in less developed nations. Third, capital has become footloose and now is available internationally to kick-start production in locations that are most likely to lead to profit maximization.

In the past 25 years, India has benefitted from this splitting up of service components and outsourcing of services.

In the late 1990s, the west made huge investments in information technology to overcome the Y2K scare. A collateral benefit of the intense research effort was increased outsourcing of services. India was fortuitously placed 12 hours away from the west - while the west slept, India worked - leading to unimaginable increases in firm productivity. At the same time, higher technical education in India opened to the private sector, resulting in the establishment of a large number of engineering colleges, and a generation of “foot soldiers” to work in the software industry.

Today, AI has the potential to upset this arrangement. A look at its trajectory shows how.

Artificial intelligence is following a pathway moving from Perception AI (machine learning, speech recognition) to Generative AI (with ChatGPT and other models) and then becoming Agentic (a coding personal assistant), before moving to physical AI with robots and self-driving cars – these are imagined to ease lives.

What is an agent? Chatbots are reactive: they return text when prompted but rarely take the next step. Agents go beyond to achieve multistep tasks. OpenAI’s ChatGPT o3 and o4 mini models are agentic by design; they can write code, run it, open a browser to verify the answer, and loop until a goal is satisfied. These are a direct threat to human jobs; Sam Altman predicts that “agents will material change the output of companies”, and Bill Gates calls them a “shock wave” that turns apps into proactive assistants.

The next article will look at the transformative changes appearing on the horizon for software jobs and tasks in the fields of health and education in India.