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.


Solving the Productivity Puzzle

February 27, 2018

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McKinsey Global Institute, “Solving the Productivity Puzzle: The Role of Demand and the Promise of Digitization,” 2018. 

This report discusses why the rate of growth in economic productivity has been so low in recent years, and how it might improve in the future.

Productivity: Why it matters

The report makes a fundamental assumption: “Productivity growth is crucial to increase wages and living standards, and helps raise the purchasing power of consumers to grow demand for goods and services.” That’s basic economics, but worth remembering at a time when people in many countries have grown accustomed to minuscule productivity growth.

Production and consumption are, of course, two sides of the same economic coin. The most obvious way for the average worker to receive more goods and services is for the average worker to produce more goods and services per hour of work. People can also get ahead by working more hours, but then they are paying for their economic gains with reduced free time.

The benefits of high productivity may not be distributed evenly, but that’s another issue. Workers may not receive their fair share of the benefits when productivity is rising, but they are even less likely to get ahead when productivity is not rising. Then the competition for benefits is more of a zero-sum game, and the haves will be especially resistant to redistributing benefits to the have-nots. The widespread assumption that anyone’s gain must be someone else’s loss is a big reason why our politics have become so ugly. (That last point is mine, not the report’s.)

Sagging productivity

The report is based on data from seven countries: France, Germany, Italy, Spain, Sweden, the United Kingdom, and the United States. Productivity is defined simply as Gross Domestic Product per hour worked.

The data show these trends for recent decades:

  • Productivity growth was strong during the postwar economic boom
  • In general, productivity growth has been much slower since the 1970s
  • A brief productivity boom occurred from about 1995-2005, especially in the United States, associated with applications of information and communications technology (ICT)
  • Productivity has stagnated since then, with near zero annual growth in both Europe and the U.S.

The report identifies three main reasons for low productivity growth, describing them as waves passing over the economy one by one.

First, the rate of innovation associated with ICT slowed after 2005. For example, big retailers like Walmart had used the new technologies to make their supply chains more efficient, but the biggest changes had already occurred by then.

Second, the financial crisis of 2007-08 ushered in a period of “weak demand and uncertainty.” Businesses were reluctant to make costly changes in production without confidence that the market could absorb the additional goods or services produced. Companies held back on new investments and held the line on wages. The economy recovered from the recession, but it was a “job-rich” and “productivity-poor” recovery. As long as there were people wanting to return to work, “companies met slowly rising demand by filling excess capacity and adding hours,” not by raising productivity and wages. Hopefully, the economy can now move beyond recovery into a new period of productivity growth and wage gains. The danger is that the economy becomes stuck in a vicious cycle, in which workers earn too little to raise demand, and businesses fail to invest in higher productivity because they can meet existing demand with low-cost labor.

Third, a revolution in digital technology is underway, but “the impact of digital is not yet evident in the productivity numbers.” Many sectors of the economy, such as education, health care and construction, are only beginning to digitize their operations. Transition costs can be high, including not only the costs of equipment and training, but the disruptive impact on existing operations. A retailer that adds an online store may suffer offsetting declines in business at its brick-and-mortar stores.

Prospects for digital-based productivity growth

As of now, the economy is in a paradoxical position: “…In an era of digitization, with technologies ranging from online marketplaces to machine learning, the disconnect between disappearing productivity growth and rapid technological change could not be more pronounced.” How long can it be before technological know-how actually translates into productivity gains and higher wage potential for the average worker?

The authors of this report see “the potential for at least 2 percent [productivity] growth a year over the next ten years, with 60 percent coming from digital opportunities.” But they also see some potential problems that need to be addressed if that potential is to be realized.

One of their concerns is the market power that digital technologies may bestow on a few hugely successful companies:

Various digital technologies are characterized by large network effects, large fixed costs, and close to zero marginal costs. This leads to a winner-take-most dynamic in industries reliant on such technologies, and may result in a rise in market power that can skew supply chains and lower incentives to raise productivity.

To put it more simply, once a company has made a large initial investment in new technologies, it may be able to turn out products so cheaply and maintain such a locked-in customer base, that it may no longer have to raise productivity to dominate a market. It might just become fat and lazy. I doubt if this phenomenon is unique to the digital age. It may be part of the dynamics of capitalism, helping to explain why productivity-based economic change comes in cycles of growth, maturation and stagnation.

Demand-side constraints on productivity

Another big concern is that weak economic demand may continue to exert a drag on investment and productivity growth. Some of the weak demand may be just cyclical, a normal after-effect of recession. But the authors of this report join other economists in worrying that some of it may be structural–that is, built into today’s economy. They express concern that “declining labor share of income and rising inequality are eroding median wage growth, and the rapidly rising costs of housing and education exert a dampening effect on consumer purchasing power.”

How digital technologies affect jobs also has implications for the demand side. In theory, the benefits of higher productivity could appear in the form of higher wages and shorter work weeks, as they did in the postwar era. If, on the other hand, a large segment of the labor force is simply replaced by smart machines, their loss of purchasing power could reduce economic demand and nip economic growth in the bud. “Unless displaced labor can find new highly productive and high-wage occupations, workers may end up in low-wage jobs that create a drag on productivity growth.”

This line of reasoning leads the authors to recommend public policies that focus on the demand side. That is in contrast to conservative policies that focus on helping the supply side (businesses and their investors) with tax cuts and looser regulations. The implicit assumption (perhaps rarely stated since it seems so counter-factual) is that the poor capitalists don’t have enough capital to raise productivity and grow the economy. If, however, the problem is more on the demand side, then the economy may be helped by government spending to supplement the purchasing power of low-income consumers, invest in public works like infrastructure repairs, make education and health insurance more affordable, and support worker retraining for new jobs.

The report also recommends that companies “rethink their employee contract in order to develop a strategy, potentially together with labor organizations, where people and machines can work side by side and workers and companies can prosper together.” If that sounds like pie in the sky in this era of anti-labor capitalism, we should remember that it is a pretty good description of the business-labor understanding that existed during the last great era of productivity growth. More of us knew then what many of us seem to have forgotten recently, that the economic engine runs best when its benefits are widely shared. In the 1950s, the “widely shared” part mainly applied to white men. Now we must learn to be even more inclusive.

Overall, the report is an optimistic, yet not unrealistic vision: “A dual focus on demand and digitization could unleash a powerful new trend of rising productivity growth that drives prosperity across advanced economies for years to come.”


Kids These Days

January 31, 2018

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Malcolm Harris. Kids These Days: Human Capital and the Making of Millennials. New York: Little, Brown and Company, 2017.

This is an unusual book, a portrait of a particular generation’s experience, interpreted in the context of a changing capitalist society. I found it reminiscent of Paul Goodman’s Growing Up Absurd from the 1950s, a book that resonated with many young Baby Boomers. Here the focus is on the Millennial generation, who were born between 1980 and 2000 and make up today’s young adults 18 to 38. Malcolm Harris himself is one of them.

Here he describes the book’s goal:

The only way to understand who we are as a generation is to look at where we come from, and the social and economic conditions under which we’ve become ourselves. What I’m attempting in this book is an analysis of the major structures and institutions that have influenced the development of young Americans over the past thirty to forty years.

Harris is not a social scientist, but just a “committed leftist and a gifted polemicist with a smart-aleck bent,” according to one reviewer. He provides no deep analysis of capitalism, but makes a broad claim that the frenetic quest for profits is now bringing society to some kind of breaking point:

Lately, this system has started to hyperventilate: It’s desperate to find anything that hasn’t yet been reengineered to maximize profit, and then it makes those changes as quickly as possible. The rate of change is visibly unsustainable. The profiteers call this process “disruption,” while commentators on the left generally call it “neoliberalism” or “late capitalism.” Millennials know it better as “the world,” or “America,” or “Everything.” And Everything sucks.

The burden of this supercharged capitalism is falling most heavily on Millennials. They will either by crushed by it, as America becomes some sort of fascist dystopia, or else lead a revolution against it. Harris sees little middle ground.

Human capital and hypercompetition

For Harris, the key to understanding what is happening to the younger generation is the idea of human capital. “We need to think about young people the way industry and the government already do: as investments, productive machinery, ‘human capital’.” Human capital is the economic value placed on the capacity for future work. New technologies can reduce that value by making existing capacities obsolete, most obviously when manual labor is replaced by machinery. But future workers can enhance their value by acquiring new capacities, enabling them to master technologies or provide some essential human input. This puts young people under pressure to become one of the value-enhanced winners instead of the devalued losers.

Isn’t this just the same old competition for success that has been a hallmark of modern society? Harris obviously sees it as more than that. As the development of human capital has become more extensive and more costly, paying for it has become a systemic problem. Society is currently organized in such a way that the benefits of human capital formation go primarily to capitalist organizations and their shareholders, while the costs fall primarily on individuals and their families. Investment in human capital is good for society, but it is risky for individual employers, since they do not normally own their workers and their future labor. Workers can leave and take their newly acquired human capital with them. So employers find it more profitable to hire workers who are already capable–or nearly capable–of doing the job; or just replace workers with robots, whose future labor they do own.

The intensified competition for good jobs becomes more than an individual competition to demonstrate merit. It is a competition among families to raise the most accomplished children they can, with the most expensive educations and all the trimmings–the music lessons, science projects, field trips, SAT prep classes, and so forth. Families of limited means are at a big disadvantage.

The paradox of productivity

In theory, the higher productivity resulting from new technologies and skills could lead to higher wages and/or more leisure. If people are more productive, why shouldn’t they enjoy a higher standard of living? And why shouldn’t the most tech-savvy generation be on its way to the highest standard of living of all? There’s little sign of that so far. “As it turns out, just because you can produce an unprecedented amount of value doesn’t necessarily mean you can feed yourself under twenty-first-century American capitalism.”

The problem goes to the heart of the capitalist system. Producing more per hour doesn’t translate into higher pay per hour if the extra output and its economic value belong solely to the employer. In that case the employer gets the benefits, in the form of higher revenues and lower labor cost per unit of output.

On the one hand, every kid is supposed to spend their childhood readying themselves for a good job in the skills-based information economy. On the other hand, improvements in productive technology mean an overall decrease in labor costs. That means workers get paid a smaller portion of the value they create as their productivity increases. In aggregate, this operates like a bait and switch: Employers convince kids and their families to invest in training by holding out the promise of good jobs, while firms use this very same training to reduce labor costs.

We may wonder why competition among employers for good workers doesn’t force them to raise wages. It does, but mainly in specialized occupations where needed skills are actually in short supply. What is remarkable is how little wages have risen in recent decades, even for college graduates. “Wages for college-educated workers outside of the inflated finance industry have stagnated or diminished, with real wages for young graduates down 8.5 percent between 2000 and 2012.” What seems to be working in favor of employers is a system that delivers a large enough supply of human capital to hold wages down, while making families bear the costs of developing that capital.

Harris notes that men and women have experienced this situation differently. “Median wages for men (50th percentile) have remained stagnant, at nearly $18 per hour, while median wages for women have increased from $11.28 in 1973 to $14.55 in 2009.” Women’s improvement in labor force participation and wages is a mixed blessing. Putting wives as well as husbands into the labor force is one way for families to try and get ahead. But it places the burden on families to work harder instead of on employers to pay better. “All work becomes more like women’s work: workers working more for less pay. We can see why corporations have adapted to the idea of women in the labor force.”

To summarize:

Technological development leads to increased worker productivity, declining labor costs, more competition, a shift in the costs of human capital development onto individual competitors, and increased productivity all over again. Millennials are the historical embodiment of this cycle run amok….

Education: The labor of enhancing one’s labor

One of my graduate school professors used to say that the social function of higher education was not to produce and disseminate knowledge, but to keep young people out of the labor force so they could serve the economy as needed consumers rather than unneeded producers. Maybe that made sense at a time when people were enjoying the new prosperity and leisure of the post-Depression, postwar era. Having recently achieved good wages and a shorter work week, unions weren’t eager to see a horde of young people enter the labor force and drive wages and working conditions down.

Harris’s take on youth and education is very different, and probably more relevant to our times. Not only are a large percentage of young people in the labor force already–70% of college students, for example–but they are working very hard at their own human capital development, primarily for the benefit of their future employers. As a result of the economic conditions described, “Every child is a capital project.”

…It’s cheaper than it used to be to hire most workers, and extraordinarily hard to find the kind of well-paying and stable jobs that can provide the basis for a comfortable life. The arms race that results pits kids and their families against each other in an ever-escalating battle for a competitive edge, in which adults try to stuff kids full of work now in the hope that it might serve as a life jacket when they’re older.

In theory, new information technologies ought to make it easier to learn. My generation could have saved many hours digging for information in the library if we could have accessed a whole world of knowledge on a laptop (not to mention the time we could have saved on a term paper if we had word processing). Paradoxically, Harris reports that American children spend more time in school, more time on homework, and less time on unsupervised play than they used to. And they are producing a lot: “Nongrade measures of educational output–like students taking Advanced Placement classes or tests, or kids applying to college–have trended upward….” Grades have risen too, and Harris is not so quick to dismiss that as mere grade inflation.

A government study reported that “the number of applicants to four-year colleges and universities has doubled since the early 1970s, [but] available slots have changed little.” That form of intensified competition allows schools to raise tuition and fees dramatically. Only part of this increase is due to reduced public funding, since the increase by private schools is almost as great. The additional revenue has not gone into instruction; on the contrary, the ample supply of graduates seeking academic employment has allowed colleges to hire more lower-paid, part-time and temporary teachers. Instead it goes mainly toward administrative salaries or amenities to attract well-heeled students.

What this all amounts to is a clear tendency for both public and private colleges to behave like businesses, passing off a lower-quality product at a higher price by tacking on highly leveraged shiny extras unrelated to the core educational mission. Stadium skyboxes, flat-screen monitors, marble floors, and hors d’oeuvres for the alumni association. Consultants of all flavors and salaried employees to make sure it’s all efficient. Competition hasn’t improved the quality of higher education, it has made colleges more like sleepaway camps or expensive resorts.

Because they are defined as students rather than real workers, students can be made to work very hard for someone else’s profit. College sports generate substantial revenue, but not for the athletes, who regularly spend thirty to forty hours a week on their sports without being paid. Many students try to enhance their credentials with unpaid internships, although research has found no more than a slight impact on job offers.

Even the time spent on social media can be seen as exploitable unpaid labor. “These technologies promise (and often deliver) connectivity, efficiency, convenience, productivity, and joy to individual users….” Older adults may see them as a frivolous form of leisure. But they are also a way that young people self-publish their creative work and build an audience for it. That also generates profits for others, most obviously for the big companies that run the sites, but also for record producers that are spared the costs and risks of developing talent themselves. They can wait and see who is becoming popular, and only then offer a recording contract.

Not only do students get little immediate reward for their hard work, but most of them have to borrow against their future earnings to finance their higher education. They have to indenture themselves to obtain an enhancement in earning power that may or may not materialize. If their schools educate them poorly–and some for-profit schools seem to make that part of their business model–borrowers are still on the hook for the money. Excessive debt is one of the reasons why today’s young adults have relatively low net worth, not just in comparison to today’s older adults, but also in comparison to young adults of an earlier time. Between 1983 and 2010, net worth dropped 21% for the 29-37 age group.

Overall, Malcolm Harris finds that the pressure to develop their own human capital has forced Millennials to compete harder for a limited supply of rewards. What they get for their harder work is the mere promise of a higher standard of living–someday. So far at least, someday has not arrived.

Continued


The New Class War

May 30, 2017

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Michael Lind, “The New Class War.” American Affairs, May 20, 2017.

Having just read Martin Ford’s The Rise of the Robots, with its very pessimistic outlook for American workers, I found Lind’s perspective to be an intriguing alternative. His article comes from what is for me an unlikely source. American Affairs is a new journal devoted to rethinking conservatism in the light of the Trump ascendancy. The way things are going, we may need another journal to make sense of a Trump descendancy. But let’s assume that at least some of what Trump represents may survive his mess of a presidency–in particular, his nationalistic concern about saving American jobs in an era of global competition. How will that impact the prevailing political ideologies?

Social class in the Cold War era

Unlike many mainstream conservatives, Lind is willing to acknowledge the reality of social class. Following scholars like James Burnham and John Kenneth Galbraith, Lind describes a “managerial elite” consisting of “private and public bureaucrats who run large national and global corporations and exercise disproportionate influence in politics and society.” This is a “mostly hereditary” class, since it draws its membership primarily from the children of the previous generation of the same elite. The class system has a semblance of meritocracy, since educational credentials are an important means of success, but access to the “right” education is itself very unevenly distributed.

As Galbraith argued, “countervailing power” can keep an elite from entirely having its way. This was especially true in the “golden age of capitalism from the 1940s to the 1970s, combining high growth with a more equal distribution of its rewards than has ever existed before or since.” In Lind’s view, the desire for national unity in the face of foreign threats was a major motivation for reaching a reasonable “settlement” of management and labor differences. Workers won the right to organize, more favorable wages and working conditions, and a stronger social safety net. The bargaining power of labor was strengthened by factors that kept the labor market tight, such as the immigration restrictions that had been passed in the 1920s, and the withdrawal of many women from the labor force at the end of World War II.

Multinational oligarchy and popular discontent

All of this changed after the breakup of the Soviet Union and the end of the Cold War. A new pattern of global production and corporate organization destroyed the existing accommodations between business and labor.

Through the empowerment of multinational corporations and the creation of transnational supply chains, managerial elites disempowered national labor and national governments and transferred political power from national legislatures to executive agencies, transnational bureaucracies, and treaty organizations. Freed from older constraints, the managerial minorities of Western nations have predictably run amok, using their near-monopoly of power and influence in all sectors–private, public, and nonprofit–to enact policies that advantage their members to the detriment of their fellow citizens.

Developed countries had long been accustomed to concentrations of economic power within domestic industries. Now those concentrations became more international, so that in many industries, a handful of giant companies controlled over half of the global market. While profits and managerial compensation soared, productivity slowed and wages stagnated. Lind believes that this was because transnational companies had other ways to pursue profits besides technology-driven productivity growth. It was easier to move factories from high-wage areas to lower-wage areas, or to take advantage of favorable tax policies. Apple not only made its iPhones in China, but channeled profits through Irish shell companies to shield billions from taxation. Transnational companies also worked to harmonize national laws in ways that favored capital, especially free trade agreements, while resisting efforts to set international standards for wages and working conditions or environmental protection.

Corporations that had to operate domestically were not as free to search the world for the cheapest labor or lowest taxes. But they did benefit from looser immigration policies that kept labor supply up and wages down in some markets. Marx had already argued in the nineteenth century that ethnic conflict divided labor and strengthened capital: “The ordinary English worker hates the Irish worker as a competitor who lowers his standard of life….His attitude towards him is much the same as that of the “poor whites” to the Negroes in the former slave states of the U.S.A….This antagonism is the secret by which the capitalist class maintains its power.”

As the income gap between the managerial class and the working class has widened, popular discontent has increased. But Lind does not think that populist movements alone will bring about very much change. Historically, oligarchies have usually been able to survive populist challenges. The populists have usually had to give up or sell out. In some places, such as the Deep South and much of Latin America, this pattern has repeated itself for a long time:

Most of the time, coteries within a nepotistic elite run things for the benefit of their class. Now and then, a charismatic populist arises, only to fail, sell out to the establishment, or establish a personal or dynastic political-economic racket. Formal democracy may survive, but its spirit has fled. No matter who wins, the insiders or outsiders, the majority will lose.

It is sobering to think that if we keep on as we are going, the country could deteriorate into a kind of banana republic with chronic and perhaps violent unrest and political repression.

Managerial elites are bound to dominate the economy and society of every modern nation. But if they are not checked, they will overreach and produce a populist backlash in proportion to their excess. By a misguided policy of suppressing wages and thus throttling mass consumption, unchecked managerial elites may inadvertently cripple the technology-driven productivity growth responsible for their rise….

This could even result in a more feudal type of society, in which the rich live off the “rents” from their accumulated wealth rather than creating new wealth by investing in higher productivity.

The multipolar challenge

So what would counteract the drift toward global oligarchy? Lind believes that peace among the international powers has been a necessary condition for managerial globalism. This has been the case “only in the decades immediately following the Cold War, when the United States was the ‘sole superpower’ and no credible ‘peer competitor’ had yet emerged.” But now, the rise of China and other powerful players may be a game-changer. Americans may have to rethink the idea that international boundaries no longer matter, and that the global economy benefits everybody in some kind of classless meritocracy. We must now ask tough questions about whether the cumulative effects of transnational capitalism on the United States are really in our national interest.

Lind sees the world becoming not borderless but multipolar, divided into several “great-power blocs,” most likely China, India, the US and Europe. Within each bloc, countries may trade very freely, but each bloc will need to be careful about giving up too much of its industrial capacity. On that may depend its ability not only to create new jobs and income, but to wage war. Strength, unity and internal harmony could become more prominent national values, as they were during the Cold War.

The elites may be too powerful to have much to fear from populism, but their division into competing power blocs may force them to fear one another. Policies that promote the wellbeing of business and labor as members of the same national team could have broad political appeal.

Unsatisfactory alternatives

Lind accepts part of Donald Trump’s critique of the United States, that we have let other countries produce too much of what we could have produced at home, creating unnecessary hardships for American workers. Our chronic trade deficit with countries like China and Germany is indeed a weakness, and their “parasitic export-oriented strategy” of development is better for them than it is for their debtors. Unlike Trump, however, he rejects the most conservative response, which he calls “radical renationalization” or “radical de-globalization.” He sees it as neither feasible nor desirable to retreat from the world by restricting the entry of foreign goods and forcing consumers to buy only what is produced at home. That would sacrifice the benefits of “supra-national economies of scale,” the efficiencies to be achieved by producing things for the largest possible market.

At the other extreme, Lind also rejects the idea that the ill effects of oligarchic globalization can be corrected by countervailing power exerted by global government, global labor unions, or other transnational institutions. He just doesn’t think that a multipolar world will produce the necessary degree of international cooperation. I thought that Lind was a little too dismissive there, since global agreements like the Paris Climate Accord may be needed, at least to address global emergencies.

A third unsatisfactory alternative is “neoliberalism plus”:

Neoliberalism plus, also called “inclusive capitalism,” is the preferred response of the transatlantic managerial class to the populist revolts in Europe and America. Essentially, neoliberalism plus is Reagan-Thatcher-Clinton-Blair neoliberalism with more subsidies to the “losers” of globalization. The disempowerment of non-elite citizens by the oligarchic capture of politics and the destruction of unions would not be altered. But the masses would be bribed into acquiescence by means of higher wage subsidies, like the Earned Income Tax Credit (EITC) in the United States, or perhaps a universal basic income providing every citizen a poverty wage.

That last measure is exactly what Martin Ford recommends in order to maintain the workers’ purchasing power as the robots take more and more of their jobs. Lind believes that such strategies will fail. As long as companies can rely on cheap labor at home or abroad, they do not need to invest much in new technologies. The full potential of those technologies cannot be realized, and the economy cannot generate the economic growth needed to pay for any new “bribes” for the masses.

I would only add that if “neoliberalism plus” is an inadequate solution, then “neoliberalism minus” is even worse. That may be a good term for the Congressional Republican agenda of more freedom and lower taxes for the elite, but benefit cuts for the struggling working class. That the President goes along with that strategy while claiming to champion the workers puts his presidency on very thin ice.

A “new developmentalism”

What Lind would like to see is a different strategy for national progress that he calls a “new developmentalism.” He describes it only in very general terms in this article. It would require new checks on the freedom of managerial elites, as well as a new “settlement” between business and labor for the sake of economic cooperation and national unity.

Lind wants great powers to compete in the global arena, but do it differently. I would describe what he wants as a “race to the top” instead of a “race to the bottom.” Public policy would discourage corporations engaged in international trade from seeking profits through lower wages and tax avoidance. For companies that operate domestically, it would encourage “tight labor markets for domestic service workers, achieved by immigration restriction, work-sharing, shorter workweeks, or other means.” High wages could boost productivity in two ways, by supporting the mass market for large-scale industries and encouraging labor-saving technologies, which themselves could be dynamic new industries. “If high wages lead to the replacement of fast-food workers by kiosks, the manufacture of the kiosks could become a new, capital-intensive, high-technology industry.”

Keeping labor markets tight and wages up, while at the same time investing in labor-saving technologies, sounds like a contradiction, and it requires a difficult balancing act. The key is productivity–using new technology not just to unemploy labor but to employ it more productively, so as to justify higher pay. That relates to what I wrote previously about favoring human-machine collaboration over the human replacement expected by Martin Ford. Replacement alone could destroy the working class and send the economy into a downward spiral.

The heart of Lind’s argument is perhaps best captured by this statement:

Great-power competition, even in the form of limited cold wars, is likely to reward nations whose economic model is based on developing productive technology and raising the incomes of domestic worker-consumers….In cold wars and trade wars, even if no blood is shed by the contenders, countries and blocs with empowered and patriotic workers are likely to do better than rival nations crippled by immiserated workforces and selfish, nepotistic, oligarchic elites.

The future may depend on how many of our leaders can figure this out.