The Knowledge Economy (part 2)

March 24, 2021

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Roberto Unger’s book lays out his vision of the emerging knowledge economy, with rapidly innovative, knowledge-based processes in the vanguard of production. So far, however, these advanced practices of production remain highly restricted—employing few workers, controlled by technological elites, and mainly benefiting a small number of global corporations. Unger observes what he calls “pseudo-vanguardism,” in which a company uses the products of advanced production—such as sophisticated software—to run large, highly regimented operations, often in parts of the world far from corporate headquarters. The creative knowledge workers of Silicon Valley are supported by low-paid assembly workers in Asia. “Genuine vanguardism remains restricted to a small inner circle of entrepreneurs, managers, and technicians—an elite of capital and of knowledge—disengaged from the social entanglements of mass production.”

This has two unfortunate consequences: the domination of the global economy by large oligarchies and the weaker position of labor in relation to capital. Most workers don’t yet receive the potential benefits of the knowledge economy, but experience instead greater job insecurity and a declining share of income relative to the owners of capital. Innovative firms want flexible work forces, so they replace secure employment with subcontracts to low-wage firms or part-time and temporary hires. These trends contribute to the “hollowing out” of the middle of the wage distribution and the increase in overall inequality. The potential of the knowledge economy to unleash creative impulses, boost productivity and raise incomes across the board is yet to be realized.

These trends are especially noticeable in the United States, as evidence I have been citing from many sources supports. Frey reported that in the last 40 years, the share of US income going to labor rather than capital has declined from 64% to 58%. Among the 36 countries in the OECD, only three rank higher than the US on the Gini index of income inequality, based on after-tax income.

Unger’s explanation for these restrictions on the knowledge economy starts with the observation that the standardized, formulaic practices of industrial mass production are simply easier to spread from one place to another. Innovative, imaginative forms of work are harder to emulate because they “cannot, as mass production can, be reduced to a stock of readily transportable machines and procedures and easily acquired abilities.” The knowledge economy makes heavier demands on society to provide cultural and institutional support for economic growth and transformation.

What would it take to make the knowledge economy more inclusive? Unger identifies requirements of several kinds:

  • Cognitive-educational requirements include technical training that is not too job-specific, more emphasis on the imaginative side of the mind, in-depth study as opposed to “encyclopedic superficiality,” cooperative rather than authoritative learning, and discussion of contrasting points of view.
  • Social-moral requirements include more emphasis on the kinds of social interdependence that we more often associate with families, communities and churches, as opposed to the unbridled self-interest of traditional business. Social supports that could help compensate for greater flexibility of employment could include portable benefits that workers could take from job to job, or a “social inheritance” granted at birth, available to help finance human capital development and career transitions.
  • Legal-institutional requirements include new forms of coordination between governments and firms. The aim would be to help more firms acquire and use the new means of production, similar to how government helped small farmers in the nineteenth century with land grants, agricultural education and economic support. Analogous support today would include intellectual property reform to keep large corporations from monopolizing the ownership of online, user-generated data.

Unger advocates for a more vigorous democracy, since he sees today’s relatively weak democracies as too easily captured by powerful interests. He wants something in between the minimal government of laissez-faire capitalism and the more intrusive government of state socialism. A stronger democracy would respect and empower group differences, but also develop more rapid and effective means of resolving disputes among them. Otherwise, government may stand by helpless and gridlocked while the economy is generating undemocratic outcomes.

In the long run, Unger expects the emerging knowledge economy to support a more egalitarian society, recent trends in the opposite direction notwithstanding. He also expects it to ameliorate the chronic imbalances of economic supply and demand that create periods of recession and stagnation. He agrees with the Keynesian economists that supply does not create its own demand, and that there is no automatic connection between advances in productive capacity and the capacity to consume. That is the main reason for economic instability. A particularly innovative firm can expand a market by producing a product at lower cost, but that may not solve the problem of economy-wide aggregate demand.

Keynesian demand-side stimulus by government can help, through easy credit or “redistributive social spending.” Government can tax or borrow under-invested savings from the wealthy in order to boost spending and consumption for all. But even that may not be enough, if the problems of stagnation and inequality are severe. This is where Unger sees an institutional solution in the transition to the knowledge economy:

[W]e eventually come to a class of solutions that do expand demand by the same means through which they increase supply: an institutionalized broadening of access to the resources, opportunities, and capabilities of production. At this point, and only at this point, that which increases demand also increases supply. What the prevalent way of thinking supposes to be the natural state of economic life—the reciprocal accommodation of supply and demand—is in fact a characteristic of exceptional varieties of economic organization: those that have the property of breaching the limits of both supply and demand by equipping more economic agents with the means and occasions for productive initiative.

To make this more concrete, consider service workers whose means of production consist mainly of personal computers, software and skills, both cognitive and social. They are both workers and owners of capital, and their capital is intellectual and social as well as material and financial. Assuming they are providing a desired social service, they simultaneously produce something of value and generate income for their own consumption. Anything that increases their access to capital—broadly defined—helps them do so. The sharp division of owners and workers so typical of industrial capitalism—and so central to its inequalities and instabilities—starts to break down.

Unger accuses mainstream economics of a “poverty of institutional imagination,” the kind of imagination he associates with Adam Smith and Karl Marx. The most “fundamentalist” of economists defend the institutional arrangements that developed in Europe and America as part of the fixed laws of capitalism. Others are “agnostic” about such arrangements, limiting the subject matter of economics to what they think would be true of any market economy. Unger doesn’t want to defend or ignore institutions like property law and labor law, but instead bring institutional change back to the center of economic analysis.

In his final chapter, Unger discusses the “higher purpose” of making the knowledge economy more inclusive. The present economy is not only vulnerable to stagnation and growing inequality, but it also wastes human potential.

By condemning the vast majority of the labor force in even the richest countries, with the most educated populations, to less productive jobs, it also belittles them. It forces them to live diminished lives, giving inadequate scope to the development of their powers and to the expression of their humanity. To overcome the evil of belittlement through the transformation of workday experience is the higher purpose of an inclusive knowledge economy.

Keynes looked forward to a time when industrial productivity would eliminate scarcity and free people from the demands of work. That made sense at a time when highly productive manufacturing workers were demanding both good wages and a shorter work week. While some material things have become more abundant, Unger doubts that we could ever have enough of every marketable commodity. He points instead to the human capacity to keep finding new things to desire, especially in an economy that can offer more customized goods and services. Even if we limit our consumption of material things—and I expect limitations on natural resources to make us do so—I agree with Unger that “there is no limit…to our desire for service and attention from one another.” Instead of “freedom from the economy,” he looks for more “freedom in the economy.” This is consistent with his willingness to let the robots do the formulaic work, while humans devote themselves to the more creative functions.

Here are Unger’s closing thoughts:

As it deepens and spreads, the knowledge economy makes the practice of production more closely resemble the workings of the imagination….

Imagination is freedom because it is transcendence in the working of the mind. A form of production giving more space to the imagination than any previous practice of production ever gave represents an advance in freedom. It justifies the hope that we might find freedom in the economy rather than only freedom from the economy.

A knowledge economy in which many can take part does more than increase productivity and diminish inequality. It has the potential to lift us up together, to offer us a shared bigness.


The Technology Trap (part 2)

August 10, 2019

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Carl Benedikt Frey uses the distinction between labor-replacing and labor-enabling technologies to explain why industrialization can have quite different short-term effects on jobs, wages, and the demand for labor. The Second Industrial Revolution did more than the first to raise labor demand, create good jobs, and increase labor’s share of national income. Here I will take a closer look at that process for the United States in the twentieth century.

New technologies

Based on the research of Michelle Alexopoulos and Jon Cohen, Frey identifies electricity and the internal combustion engine as the most important general-purpose technologies of the Second Industrial Revolution. Both originated in the late nineteenth century but were widely applied in the twentieth. Both were essential to what became the country’s largest industry by 1940, automobile production.

A distinct “American system” of manufacturing was substantially boosting productivity by the 1920s. The model-T Ford was the first product to be assembled without any hand labor for fitting pieces together, since machine tools could now produce completely standardized and interchangeable parts. Another innovation was “unit drive”–machines with their own electric motors–which “allowed factory workflows to be reconfigured to accommodate assembly line techniques, as machinery could now be arranged according to the natural sequence of manufacturing operations.”

Electricity also enabled the production of new home appliances, “such as the iron (first introduced in the market in 1893), vacuum cleaner (1907), washing machine (1907), toaster (1909), refrigerator (1916), dishwasher (1929), and dryer (1938).” These time-savers made it easier for women to enter the labor force, earning money with which to buy more of the products being made.

The internal combustion engine revolutionized transportation, as the share of households with cars went from 2.3% in 1910 to 89.8% in 1930. The share of farms with tractors went from 3.6% in 1920 to 80% in 1960. The Federal Aid Highway Act of 1956 created better highways for cars and trucks to travel. Economists have attributed over a quarter of the increase in productivity between 1950 and 1970 to spending on highways.

Frey summarizes:

America’s great inventions of the period 1909–49 were predominantly of the enabling sort. Some jobs were clearly destroyed as new ones appeared, but overall, new technologies boosted job opportunities enormously. Indeed, gigantic new industries emerged, producing automobiles, aircraft, tractors, electrical machinery, telephones, household appliances, and so on, which created an abundance of new jobs. Vacancies rose and unemployment fell as the mysterious force of technology progressed.

Wages and working conditions

In general, wages rose along with productivity from 1870 to 1980. Since this hasn’t been true throughout history–and especially not lately–we have to say that rising productivity is helpful but not sufficient to produce wage increases. Frey suggests that concerns about worker turnover were one motive for employers to raise wages. “[T]he assembly line could be slowed if an experienced worker quit and was replaced by someone who could not initially keep pace.” Keeping labor peace in the face of worker organization and agitation was another motive.

A democratic society can also legislate on behalf of workers, especially if middle-class voters identify with their concerns. That was more the case during the Great Depression, when New Deal legislation supported worker interests. The National Labor Relations Act of 1935 guaranteed the right to organize and bargain with management, and the Fair Labor Standards Act of 1938 defined the standard work week as 40 hours and required employers to pay overtime for additional hours.

New technologies also created safer and less physically demanding workplaces. “Machines meant the end of the most hazardous, dirty, and backbreaking jobs,” and disabling injuries were cut in half. “Belts, gears, and shafts [of the pre-electric factory] were the main sources of factory accidents, posing a constant danger to workers’ fingers, arms, and lives.”

The “Great Leveling”

In retrospect, the twentieth century up until about 1980 is noted not only for its greater prosperity, but its reduction in economic inequality. Inequality had increased between the American Revolution and the Civil War, as artisan jobs had been lost to factories, large fortunes were being amassed, and large wage gaps had opened up between the most successful urban workers and the masses of poor people both on the farms and in the cities. The late nineteenth century is, of course, known as the “Gilded Age” for its conspicuous consumption by wealthy capitalists.

The twentieth century was different:

As Americans in the middle and at the lower end of the income distribution became the prime beneficiaries of progress, inequality went into reverse. Along with every other industrialized nation, America saw the share of income accruing to people at the top, fall.

Here, explanations differ. Thomas Piketty has argued that the general trend of capitalism is toward greater inequality, and it takes some unusual shock to the system to interrupt that process. As summarized by Frey:

In Piketty’s world, there are no forces within capitalism that serve to drive inequality down. From time to time, however, macroeconomic or political shocks may disrupt the normal equilibrium. Two world wars and the Great Depression served to destroy the riches of the wealthy.

Without denying that such shocks have played a role, Frey does see forces within capitalism to generate equality, the first of which is investment in labor-enabling technologies. That creates the potential to empower and enrich workers. A high rate of unionization is helpful for realizing that potential. Beyond that, workers must be able to keep up with the skill demands of new technologies.

“The leading explanation for the great leveling comes from pioneering work by Jan Tinbergen that conceptualized patterns of inequality as a race between technology and education….” The enabling technologies of the twentieth century favored more skilled workers. Jobs like mechanic or electrician paid well, but only for those who had the skills to do them. Semi-skilled assembly-line work could also pay pretty well, for workers with the discipline, stamina and dexterity to keep up. That could have created a wide gap between a skilled few and the unskilled many, except for the fact that so many workers were acquiring at least the basic skills they needed for an advanced industrial economy.

[E]ven if technological progress favors skilled workers, growing wage inequality does not have to be the result. The return to human capital depends on demand as well as supply. As long as the supply of skilled workers keeps pace with the demand for them, the wage gap between skilled and unskilled workers will not widen. While a number of short-run events and government interventions contributed to the great leveling, the most pervasive force—and certainly the best documented one—behind its long-run egalitarian impact was the upskilling of the American workforce, which depressed the skill premium.

The percentage of young people who completed a high-school education went from 9% to 40% just between 1910 and 1935, and proceeded upward from there.

The combination of enabling technology and a more skilled population created the largest middle class the country had ever seen. But that made the shrinking of the middle class that occurred after 1980 all the more surprising and alarming. Frey calls this the “Great Reversal,” and that is the topic of the next post.

Continued


Automation and New Tasks

February 22, 2019

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Daron Acemoglu and Pascual Restrepo, “Automation and New Tasks: The Implications of the Task Content of Production for Labor Demand.” Prepared for Journal of Economic Perspectives, November 6, 2018.

This paper really helped me think more systematically about the impact of automation on the demand for labor, something I’ve been thinking a lot about lately. My last post on the subject, which also featured a paper by Acemoglu and Restrepo, is here.

Technology and labor demand

One of the key issues is how to reconcile the recent concern that robotics will destroy too many good jobs with the traditional optimism of economists about the effects of technology. Throughout most of U.S. history, new technologies like farm machinery or industrial assembly lines have not stood in the way of economy-wide gains in labor demand, as reflected in real wages per capita. And yet, too many workers today are experiencing unemployment or wage loss because of automation. How do we sort this out in a way that enables us to anticipate where we may be headed and formulate sensible policy responses?

Acemoglu and Restrepo conceptualize the labor demand of an industry as a product of “value added” and “labor share”:

Labor demand = Value added x Labor share

Value added is an industry’s addition to economic output and income. Labor share is the portion of that added value that is received by labor. Labor demand is the resulting wages per capita.

The authors say that economists have primarily conceptualized technological progress as “factor-augmenting.” That is, new technologies increase the productivity of labor or machinery or both. More productive factors of production mean more value added. Assuming that labor’s share doesn’t decline, labor demand as reflected in real wages ought to increase. “Factor augmenting technologies affect labor demand mostly via the productivity effect and have a small impact on the labor share of an industry.” That was the experience, for example, of manufacturing industries in the mid-20th century.

However, an analysis that focuses on value added while holding labor share constant is not complete. Technological change can also effect how much labor is needed in a particular process of production, and how much of the income from that process goes to workers.

The task content of production

The authors’ key concept is the task content of production, which involves the allocation of tasks between labor and capital (the latter including machines and software). Focusing on the potential of new technologies to add value “often misses the major implications of technological changes that directly alter the allocation of tasks to factors.”

What makes the implications of automation hard to assess is that it has contradictory effects on labor demand–a productivity effect and a displacement effect. By raising productivity and increasing value added, it increases the potential income to be distributed to the human workers who remain. But by replacing labor with machinery, it reduces labor’s share of income. Whether wages actually rise or fall depends on the relative strength of the two effects.

To complicate things further, displaced labor does not necessarily go missing from an industry, let alone the economy as a whole. The introduction of new tasks for humans to do has a reinstatement effect that raises the labor share of production and therefore labor demand. (Personally, I’m not too fond of the term “reinstatement”, since it sounds as if workers are getting their old jobs back, which is not at all what is intended. I would prefer the term “redeployment”.) But whatever term is used, the point is important. As machines take over familiar tasks, humans can move into new economic activities where they have some advantage over machines, especially because of their general intelligence, flexibility and creativity. This has been true in the past, and how much it remains true in the robotic age is an important question for the future of work.

Labor demand in a multi-sector economy

When the authors move from discussing individual industries to discussing the entire economy, they introduce an additional effect on labor demand, the composition effect. This occurs when labor moves from one economic sector to another, and the sectors differ in labor demand. If workers move out of a sector where wages and labor’s share of added value are falling, and into a sector where they are higher, that contributes positively to labor demand.

The classic example of this process is the mechanization of agriculture, “which started in the first half of the 19th century with the cotton gin and continued with horse-powered reapers, harvesters and plows later in the century and with tractors and combine harvesters in the 20th century.” That process displaced massive amounts of farm labor and reduced labor’s share of agricultural activity and income. Much of that displaced labor went into manufacturing. Manufacturing was mechanizing too, but it maintained labor demand by increasing output and creating new manufacturing tasks. “The composition and reinstatement effects explain why, despite the mechanization of a sector making up a third of the economy [agriculture in 1850], labor demand increased and the share of labor in national income remained stable during this period.”

Labor demand 1947-1987

For two recent periods, Acemoglu and Restrepo analyze changes in labor demand, measuring the relative contributions of the effects they have discussed. They chart developments in six industries: agriculture, mining, manufacturing, construction, transportation and services.

The postwar era of 1947-1987 was a period of strong labor demand and rising real wages, which grew at an average rate of 2.4% per year.

Nothing comparable to the displacement of labor by the mechanization of agriculture occurred during this time. The only industries to suffer a loss of labor share were the relatively small industries of mining and transportation.

There was some displacement of labor due to automation in the large manufacturing industry, but it was offset by the creation of new manufacturing jobs, such as managerial and clerical jobs in corporate bureaucracies, as well as jobs in the expanding service industries. “[T]here was plenty of automation, especially in manufacturing, but this was accompanied with the introduction of new tasks (or other changes increasing the task content of production in favor of labor) in both manufacturing and the rest of the economy that offset the adverse labor demand consequences of automation.”

With displacements due to automation balanced by reinstatements due to the creation of new tasks, labor’s share of output and income remained steady. The increase in actual real wages that occurred is accounted for almost entirely by the other effect that supports labor demand, higher productivity. New technologies added value, and labor got its share of that added value in the form of higher real wages.

If technological change always worked that way, we wouldn’t be so worried about the future. But there was trouble ahead. In their data for those years, we can already see labor’s share within manufacturing peaking around 1980 and starting downward.

Labor demand 1987-2017

In this more recent period, wage growth was slower, averaging only 1.3% per year.

Labor demand suffered in both ways suggested by the same formula:

Labor demand = Value added x Labor share

Value added increased more slowly because of slower growth in productivity. In addition, labor’s share of value added declined in manufacturing, construction and mining. That was because labor displacement due to automation accelerated, while labor reinstatement due to new task creation slowed down.

Deeper explanations for these trends are harder to agree on. One puzzle is why the accelerating automation hasn’t done more to raise productivity. The authors point out that productivity gains from automation depend on the actual superiority of machines over humans for a given task. A rush to automate because a company gets caught up in a wave of technological enthusiasm or receives a tax break on new equipment may not be that helpful.

This analysis clarifies that automation will reduce labor demand when the productivity effect is not very large. Contrary to a common presumption in popular debates, it is not the “brilliant” automation technologies but those that are “so-so” and generate only small productivity improvements that will reduce labor demand. This is because the positive productivity effect of so-so technologies is not sufficient to offset the decline in labor demand due to displacement.

Favoring machines over human workers may also result in a lack of investment in education and training:

…[T]here may be a mismatch between the available skills of the workforce and the needs for new technologies, which could further reduce productivity gains from automation and hamper the introduction of new tasks—because the lack of requisite skills reduces the efficiency with which new technologies can be deployed.

The future of work

By considering a variety of things affecting labor demand, Acemoglu and Restrepo avoid a simple preoccupation with a positive factor like the productivity effect or a negative factor like the displacement effect. “Our evidence and conceptual approach support neither the claims that the end of human work is imminent nor the presumption that technological change will always and everywhere be favorable to labor.” It will be the balance of the various effects that will matter.

The authors don’t make specific policy recommendations, but some very general prescriptions follow from their analysis. We shouldn’t be afraid to automate tasks where machines have a clear advantage, since the gains in value added are too good to pass up. But we should also enhance the value of human labor, both by giving the workers who remain in automating industries their share of the gains, and also by investing in the education and training workers need to perform new tasks that humans can do better than machines. Where private employers don’t find it profitable to nurture and reward human labor, government must play a strong role for the general good.

As it stands now, too much displaced labor is crowding into low-skill, low-tech, low-wage work. That is a waste of both our human and technological resources. A jobless future where robots work, their owners get rich, and most people live off public assistance is also a dismal prospect. If we are to have a hi-tech economy, let it be one where the average worker can reap the benefits in creative work, good pay, and rewarding leisure.


Effects of New Technologies on Labor

January 4, 2019

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David Autor and Anna Salomons, “Is automation labor share-displacing? Productivity growth, employment, and the labor share.” Brookings Papers on Economic Activity, Spring 2018.

Daron Acemoglu and Pascual Restrepo, “Robots and jobs: Evidence from US Labor Markets.” National Bureau of Economic Research, March 2017.

I have been interested in automation’s effects on the labor force for a long time, especially since reading Martin Ford’s Rise of the Robots. Ford raises the specter of a “jobless future” and a massive welfare system to support the unemployed.

Here I discuss two papers representing some of the most serious economic research on this topic.

The questions

To what extent do new technologies really displace human labor and reduce employment? The potential for them to do so is obvious. The mechanization of farming dramatically reduced the number of farm workers. But we can generalize only with caution. In theory, a particular innovation could either produce the same amount with less labor (as when the demand for a product is inelastic, often the case for agricultural products), or produce a larger amount with the same labor (when demand expands along with lower cost, as with many manufactured goods). An innovation can also save labor on one task, but reallocate that labor to a different task in the same industry.

Even if technological advances reduce the labor needed in one industry, that labor can flow into other industries. Economists have suggested several reasons that could happen. One involves the linkages between industries, as one industry’s productivity affects the economic activity of its suppliers and customers. If the computer industry is turning out millions of low-cost computers, that can create jobs in industries that use computers or supply parts for them. Another reason is that a productive industry affects national output, income and aggregate demand. The wealth created in one industry translates into spending on all sorts of goods and services that require human labor.

The point is that technological innovations have both direct effects on local or industry-specific employment, and also indirect effects on aggregate employment in the economy as a whole. The direct effects are more obvious, which may explain why the general public is more aware of job losses than job gains.

A related question is the effect of technology on wages, and therefore on labor’s share of the economic value added by technological change. Do employers reap most of the benefits of innovation, or are workers able to maintain their share of the rewards as productivity rises? Here too, aggregate results could differ from results in the particular industries or localities experiencing the most innovation.

The historical experience

American history tells a story of painful labor displacement in certain times, places and industries; but also a story of new job creation and widely shared benefits of rising productivity. Looking back on a century of technological change from the vantage point of the mid-20th century, economists did not find negative aggregate effects of technology on employment or on labor’s share of the national income. According to Autor and Salomons:

A long-standing body of literature, starting with research by William Baumol (1967), has considered reallocation mechanisms for employment, showing that labor moves from technologically advancing to technologically lagging sectors if the outputs of these sectors are not close substitutes. Further,…such unbalanced productivity growth across sectors can nevertheless yield a balanced growth path for labor and capital shares. Indeed, one of the central stylized facts of modern macroeconomics, immortalized by Nicholas Kaldor (1961), is that during a century of unprecedented technological advancement in transportation, production, and communication, labor’s share of national income remained roughly constant.

Such findings need to be continually replicated, since they might hold only for an economy in a particular place or time. In the 20th century, the success of labor unions in bargaining for higher wages and shorter work weeks was one thing that protected workers from the possible ill effects of labor-saving technologies.

Recent effects of technological change

Autor and Salomons analyze data for OECD countries for the period 1970-2007. As a measure of technological progress, they use the growth in total factor productivity (TFP) over that period.

They find a direct negative impact of productivity growth on employment within the most affected industries. However, they find two main indirect effects that offset the negative impact for the economy as a whole:

First, rising TFP within supplier industries catalyzes strong, offsetting employment gains among their downstream customer industries; and second, TFP growth in each sector contributes to aggregate growth in real value added and hence rising final demand, which in turn spurs further employment growth across all sectors.

To put it most simply, one industry’s productivity may limit its own demand for labor, but its contribution to the national output and income creates employment opportunities elsewhere.

With regard to labor’s share of the economic benefits, the findings are a little different. Here again, the researchers find a direct negative effect within the industries most affected by technological innovation. But in this case, that effect is not offset, for the most part, by more widespread positive effects.

The association between technological change and labor’s declining share varied by decade. Labor’s share actually rose during the 1970s, declined in the 1980s and 90s, and then fell more sharply in the 2000s. The authors mention the possibility that the newest technologies are especially labor-displacing, but reach no definite conclusion. Another possibility is that non-technological factors such as the political weakness of organized labor are more to blame.

The impact of robotics

Autor and Salomons acknowledge that because they used such a general measure of technological change, they couldn’t assess the impact of robotics specifically. They do cite work by Georg Graetz and Guy Michaels that did not find general negative effects of robots on employment or labor share in countries of the European Union. That’s important, since many European countries have gone farther than we have in adopting robots.

The paper by Acemoglu and Restrepo focuses on the United States for the period 1990-2007. (They deliberately ended in 2007 so that the impact of the Great Recession wouldn’t muddy the waters.)

The authors used the definition of robot from the International Federation of Robotics, “an automatically controlled, reprogrammable, and multipurpose [machine].” Over the period in question, robot usage increased from 0.4 to 1.4 per thousand workers. “The automotive industry employs 38 percent of existing industrial robots, followed by the electronics industry (15 percent), plastic and chemicals (10 percent), and metal products (7 percent).”

Adoption of industrial robots has been especially common in Kentucky, Louisiana, Missouri, Tennessee, Texas, Virginia and West Virginia. As Thomas B. Edsall titled his recent New York Times column, “The Robots Have Descended on Trump Country.”

Acemoglu and Restrepo classified localities–technically “commuter zones”–according to their “exposure” to robotics, based on their levels of employment in types of jobs most conducive to robotization.

Their first main finding was a direct negative effect of robotics on employment and wages within commuting zones:

Our estimates imply that between 1990 and 2007 the increase in the stock of robots…reduced the employment to population ratio in a commuting zone with the average US change in robots by 0.38 percentage points, and average wages by 0.71 percent (relative to a commuting zone with no exposure to robots). These numbers…imply that one more robot in a commuting zone reduces employment by about 6 workers.

The workers most likely to be affected are male workers in routine manual occupations, with wages in the lower-to-middle range of the wage distribution

In the aggregate, these local effects are partly offset by “positive spillovers across commuting zones”–positive effects on employment and wages throughout the economy. With these spillovers taken into account, the estimated effects of robotics on employment and on wages are cut almost in half, dropping to 0.20 percent and 0.37 percent respectively.

The authors state their conclusion cautiously, as “the possibility that industrial robots might have a very different impact on labor demand than other (non-automation) technologies.”

Summary

While there is little doubt that new technologies often displace labor in particular industries and localities, the aggregate effects on employment and wages are less consistent.  Historically (late 19th and early 20th centuries), employment and labor share of income held up very well. For developed countries in the period 1970-2007, Autor and Salomons found a mixed picture, with robust employment but declining labor share after 1980. With respect to robotics specifically, Graetz and Michaels did not find declines in employment or labor share in the European Union, but Acemoglu and Restrepo found some decline in both employment and wages in the U.S.

It seems fair to say that the jury is still out on the effects of automation on the labor force. It may be that automation has no inevitable effect, but that it depends on how we as a society choose to deal with it. We shouldn’t assume a world of mass unemployment and widespread government dependency on the basis of recent, preliminary results from one country. Authors such as Thomas Friedman, who are more optimistic than Martin Ford about the long-run effects of new technologies, have yet to be proved wrong.


MMT 7: A Full Employment Proposal

July 11, 2018

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This is the seventh in a series of posts about Modern Monetary Theory, based on the text by Mitchell, Wray and Watts. If you have not seen the earlier posts, I recommend that you start at the beginning.

The goal of full employment

The authors argue for full employment on both economic and ethical grounds. Enabling everyone who wants a job to get one maximizes national economic output, providing more goods and services to distribute. Failing to do so not only hurts unemployed individuals and their families, but does lasting damage to economy and society in general:

Persistently high unemployment not only undermines the current welfare of those affected and slows down the growth rate in the economy below its potential, but also reduces the medium- to longer-term capacity of the economy. The erosion of skills and lack of investment in new capacity means that future productivity growth is likely to be lower than if the economy was maintained at higher rates of activity.

The authors are very critical of the dominant trend in recent economic policy, which is to tolerate unemployment while giving priority to fighting inflation. Policymakers came to accept unemployment rates far above the 2% or lower that was normal in the mid-twentieth century. High unemployment has also been accompanied by underemployment, as many workers have been unable to work as many hours as they would like, and also labor force withdrawals, especially by men. The official unemployment rate does not tell the whole story.

The inflation-fighting part has worked pretty well. Sluggish economic growth and high unemployment weaken the bargaining position of labor and help keep wages down. In turn, low labor costs and weak consumer demand keep firms from raising prices. In general, “the use of unemployment as a tool to suppress price pressures has, based on the OECD experience since the 1990s, been successful.”

The authors are troubled by the injustice of making a minority of the population bear the costs of a weak economy. “Joblessness is usually concentrated among groups that suffer other disadvantages: racial and ethnic minorities, immigrants, younger and older individuals, women (especially female heads of households with children), people with disabilities, and those with lower educational attainment.” I would add that the injustice is compounded if those who do make income gains in this economy are mainly the wealthiest 1%. The benefits of price and currency stability are somewhat more widely shared, but “it is doubtful that a case can be made for their status as a human right on par with the right to work.”

The Job Guaranty

Not all countries experienced high unemployment after the end of the postwar economic boom. Some, such as Norway, did more to insure that everyone who wanted to work could find a job.

The idea of the Job Guaranty is fundamentally simple. Since full employment is such a social and economic good, the public sector should take up the slack by employing those who cannot find jobs in the private sector.

“Private firms only hire the quantity of labour needed to produce the level of output that is expected to be sold at a profitable price. Government can take a broader view to include promotion of the public interest, including the right to work.”

The Job Guaranty is also known as the “employment buffer stock approach.” A stock of public jobs provides a buffer to protect the economy from a weak private sector.  Government acts to stabilize employment, spending to hire more labor when the private sector is weak, and reducing spending and public employment when it is strong. That would also have a stabilizing effect on national income and consumption.

The authors suggest that the wages paid in the Job Guaranty program would function like a national minimum wage, since they should be low enough to “avoid disturbing the private sector wage structure when the JG is introduced.” It wouldn’t compete with the private sector enough to drive up wages in general. On the other hand, they also want the wages to express “the aspiration of the society in terms of the lowest acceptable standard of living.” They do not discuss how these goals might be in conflict, but advocates of a “living wage” generally regard today’s minimum wage as too low.

Price stability

Proponents of the Job Guaranty expect it to be less inflationary than traditional Keynesian policies, which recommend government spending in general to stimulate the economy. When government increases its general spending, that runs the risk of driving prices up by competing with private firms for labor and other resources. However:

There can be no inflationary pressures arising directly from a policy where the government offers a fixed wage to any labour that is unwanted by other employers. The JG involves the government buying labor off the bottom, in the sense that employment at the minimum wage does not impose pressure on the market-sector wage structure.

Government would not be involved in a bidding war with private companies for labor, since it would only be hiring labor for which there was no other demand.

The benefits would ramify throughout the economy because of the growth in public works, income, and consumer demand. That should stimulate some expansion in the private sector as well, to meet the increased demand. Private firms could get the additional workers they needed by hiring them away from the Job Guaranty program. That would be fine with the government, which would no longer need to employ them. The program simply absorbs unneeded labor until it is needed again, but does nothing to bid up the price of labor. It supplies a boost to aggregate demand only when there is enough unused capacity in the economy to respond to it. So there is no reason to expect either cost-push or demand-pull inflation as a result of the JG itself.

Effects on public deficit and private surplus

The expected economic effects of a Job Guaranty follow from the macroeconomic relationships described earlier.

GNP = C + I + G + CAB  [see MMT 3]

Gross National Product = Consumption + Investment + Government Spending + Current Account Balance

(T – G) + (S – I) + (-CAB) = 0  [see MMT 4]

These three sector financial balances add to zero:

T – G = Government balance of tax revenue minus spending

S – I = Private sector balance of saving minus investment

-CAB = External sector balance expressed as the current account surplus held by trading partners

Let’s start from the present U.S. situation, where financial surpluses in the private sector and the external sector are balanced by a large government deficit.

Let’s hold the external balance constant, so we can concentrate on the effects of a Job Guaranty on the domestic sectors, public and private.

When the Job Guaranty program starts:

  • G rises
  • GNP rises even more than G, because of the consumption multiplier
  • Government deficit rises
  • Private sector surplus rises

We are assuming that the increase in G is not offset by an increase in taxes. That would keep the increase from showing up in disposable income and block the multiplier effect on consumption. Since G rises but T doesn’t, the deficit (T – G) rises.

According to Modern Monetary Theory, the sovereign government can issue currency to spend beyond its revenue, and this public debt is sustainable. The government can also borrow money by issuing more treasury bonds without “crowding out” private borrowing, as is often alleged. That’s because the private surplus must increase in tandem with the public debt in order for the sector balances to offset. The mechanism by which this happens is the effect of Government spending on Saving due to the saving multiplier. Some of each additional dollar of income is saved, so S rises, and the surplus S – I must rise as much as the deficit T – G, other things being equal.

At the end of MMT 4, I expressed some concern that surplus savings not invested in real productive assets could lead to excess speculation and financial instability. This text does not address that possibility, but it makes me nervous about growing public deficits and private surpluses indefinitely.

Hopefully, the Job Guaranty program stimulates the general economy. As aggregate demand rises, the private sector needs to hire away more of the labor in the Job Guaranty program, so the program can be scaled back. But in order to sustain GNP at a high level, another variable in the GNP equation must increase to offset any reduction in government spending. Presumably that would be Investment, since the firms hiring more labor will also be providing more workplaces, equipment and expanded inventories. That leads to this optimistic scenario:

As private sector demand picks up:

  • G falls, but I rises
  • GNP is sustained at full-employment level
  • Government deficit falls
  • Private surplus falls

Private surplus (S – I) falls because of the rise in investment, which absorbs more of the uninvested saving. I also think that when the private sector is strong, it might be a good time to reduce the public deficit and private surplus by raising taxes on the wealthy, but the text does not get into that.

Necessary but not sufficient?

I like the text’s proposal for a Job Guaranty. I accept the authors’ argument that increasing public debt to fund it is not necessarily bad, since public debt is more sustainable than private debt. I would hope, though, that a period of expansionary fiscal policy might get the economy to a place where public deficits and other sector imbalances could actually be reduced.

One potential problem with the optimistic scenario is that investment in new technologies might displace too much labor, throwing millions of workers back into the Job Guaranty program. As private sector demand picks up and the private labor force moves toward full employment, that would strengthen the bargaining power of labor, according to the author’s conflict theory (see MMT 6). Ideally, investment in new technologies would raise worker productivity and justify wage increases. That would be a long overdue boost in productivity, which has been rather stagnant lately. On the other hand, automated and artificially intelligent systems could replace too many workers, especially those with limited education and technical skills. One can imagine a large underclass of otherwise unemployable workers stuck in minimum-wage jobs in the Job Guaranty program.

In order to develop human potential to the fullest, which is one of the text’s goals, government may need to spend on human capital development as well as the Job Guaranty, although the same program would have some effect on both. General spending to promote education, training, health care, and so forth are also needed.

Writers such as Martin Ford in The Rise of the Robots envision a massive welfare system to support people whose labor is no longer needed. I agree with the authors of Modern Monetary Theory and Practice that paying people not to work is a tremendous waste of human resources. “Providing welfare rather than work to those who want to work is not only an admission of defeat (the labour market fails to provide enough jobs), but also wastes resources and generates social costs.”

I accept the fundamental premise of this economics that “the most important resource in any economy is labour.” I want to enable people to do marketable work of some kind, although new technologies could raise productivity to the point where they wouldn’t need to devote many hours to it. I think that goal is best achieved through a balance of public and private investment. I hardly need to point out that little of this is likely until the present regime is history.