Of Wages and Robots

There is a popular meme going around, popularised by the likes of Tyler CowenPaul Krugman and Noah Smith that suggests that recent falls in worker compensation as a percentage of GDP is mostly due to the so-called “rise of the robots”:

For most of modern history, two-thirds of the income of most rich nations has gone to pay salaries and wages for people who work, while one-third has gone to pay dividends, capital gains, interest, rent, etc. to the people who own capital. This two-thirds/one-third division was so stable that people began to believe it would last forever. But in the past ten years, something has changed. Labor’s share of income has steadily declined, falling by several percentage points since 2000. It now sits at around 60% or lower. The fall of labor income, and the rise of capital income, has contributed to America’s growing inequality.

In past times, technological change always augmented the abilities of human beings. A worker with a machine saw was much more productive than a worker with a hand saw. The fears of “Luddites,” who tried to prevent the spread of technology out of fear of losing their jobs, proved unfounded. But that was then, and this is now. Recent technological advances in the area of computers and automation have begun to do some higher cognitive tasks – think of robots building cars, stocking groceries, doing your taxes.

Once human cognition is replaced, what else have we got? For the ultimate extreme example, imagine a robot that costs $5 to manufacture and can do everything you do, only better. You would be as obsolete as a horse.

Now, humans will never be completely replaced, like horses were. Horses have no property rights or reproductive rights, nor the intelligence to enter into contracts. There will always be something for humans to do for money. But it is quite possible that workers’ share of what society produces will continue to go down and down, as our economy becomes more and more capital-intensive.

So, does the rise of the robots really explain the stagnation of wages?

This is the picture for American workers, representing wages and salaries as a percentage of GDP:

WASCURGDP

It is certainly true that wages have fallen as a percentage of economic activity (and that corporate profits as a percentage of economic activity have risen — a favourite topic of mine).

But there are two variables to wages as a percentage of GDP. Nominal wages have actually risen, and continued to rise on a moderately steep trajectory:

WASCUR_Max_630_378

And average wages continue to climb nominally, too. What has actually happened to the wages-to-GDP ratio, is not that America’s wage bill has really fallen, but that wages have just not risen as fast as other sectors of GDP (rents, interest payments, capital gains, dividends, etc). It is not as if wages are collapsing as robots and automation (as well as other factors like job migration to the Far East) ravage the American workforce.

It is more accurate to say that there has been an outgrowth in economic activity that is not yielding wages beginning around the turn of the millennium, and coinciding with the new post-Gramm-Leach-Bliley landscape of mass financialisation and the derivatives and shadow banking megabubbles, as well the multi-trillion dollar military-industrial complex spending spree that coincided with the advent of the War on Terror. Perhaps, if we want to look at why the overwhelming majority of the new economic activity is not trickling down into wages, we should look less at robots, and more at the financial and regulatory landscape where Wall Street megabanks pay million-dollar fines for billion-dollar crimes? Perhaps we should look at a monetary policy that dumps new money solely into the financial sector and which has been shown empirically to enrich the richest few far faster than everyone else?

But let’s focus specifically on jobs. The problem with the view that this is mostly a technology shock is summed up beautifully in this tweet I received from Saifedean Ammous:

The Luddite notion that technology might render humans obsolete is as old as the wheel. And again and again, humans have found new ways to employ themselves in spite of the new technology making old professions obsolete. Agriculture was once the overwhelming mainstay of US employment. It is no more:

farmjobs

This did not lead to a permanent depression and permanent and massive unemployment. True, it led to a difficult transition period, the Great Depression in the 1930s (similar in many ways, as Joe Stiglitz has pointed out, to the present day). But eventually (after a long and difficult depression) humans retrained and re-employed themselves in new avenues.

It is certainly possible that we are in a similar transition period today — manufacturing has largely been shipped overseas, and service jobs are being eliminated by improvements in efficiency and greater automation. Indeed, it may prove to be an even more difficult transition than that of the 1930s. Employment remains far below its pre-crisis peak:

EMRATIO_Max_630_378

But that doesn’t mean that human beings (and their labour) are being rendered obsolete — they just need to find new employment niches in the economic landscape. As an early example, millions of people have begun to make a living online — creating content, writing code, building platforms, endorsing and advertising products, etc. As the information universe continues to grow and develop, such employment and business opportunities will probably continue to flower — just as new work opportunities (thankfully) replaced mass agriculture. Humans still have a vast array of useful attributes that cannot be automated — creativity, lateral thinking & innovation, interpersonal communication, opinions, emotions, and so on. Noah Smith’s example of a robot that “can do everything you can do” won’t exist in the foreseeable future (let alone at a cost of $5) — and any society that could master the level of technology necessary to produce such a thing would probably not need to work (at least in the sense we use the word today) at all. Until then, luckily, finding new niches is something that humans have proven very, very good at.

47 thoughts on “Of Wages and Robots

  1. Is DoubleLine preparing to enter en masse into US Stocks if Gold Soars to $20,000 (without the US$ crashing) so they can capitalise on cheap Stocks in terms of Gold?

  2. Well, we the people please tell the politicians that we can so collect the hell income tax out of the Robots. Income tax collected from the Robots can be used for food stamps and other kind of welfare.

  3. This argument that robots steal from the working man is silly.

    Do you want to spend hours picking out seeds from cotton or do you want to dump the cotton into a gin and save yourself 12 hours of work?

    Wouldn’t the increase in productivity allow the transfer of capital and free up labor?

    Has China’s work force felt the same pinch?

    I thought this problem had been solved?

  4. Professor Charles Goodhart was just kind enough to email me this, Aziz:

    The two concepts of money: implications for the analysis of optimal currency areas

  5. If robots do all the menial unpleasant jobs and people become redundunt who will buy all the products and services? Can humans be eliminated and just have robots and afew human elites running everything?

    It sounds logical.

    However see:

    http://homebrewindustrialrevolution.wordpress.com/

    for less centralized forms of production.

    especially this chapter:

    The Small Workshop, Desktop Manufacturing, and
    Household Production
    A. Neighborhood and Backyard Industry

    • Think of EBT payments to buy these cheap commodities as a “social contract” between the poor and the rich.

      The poor won’t eat the rich if they are sated!

  6. Today, you press a button and the washing machine works for you. You press a button and the coffee flows into the coffee maker. You turn the ignition key and the car whirs. So – in principle – should work less than yesterday while keeping a good salary.
    Everything comes from the cost of the first fixing markets! The world produces more than yesterday, and agriculture developed. It is a false shortage!

  7. This article is hilarious:

    Here’s What Happened the Last Time the U.S. Defaulted on Its Debt

    http://www.theatlantic.com/business/archive/2013/01/heres-what-happened-the-last-time-the-us-defaulted-on-its-debt/267205/

    Once upon a time, Congress didn’t want to raise the debt ceiling, and sent the country into default. It was bad, and we shouldn’t do it again. The end.

    I wonder, though, what actually would happen? Is it just that politicians don’t get paid?

    • To be honest, I find the prospect of US default pretty darn scary. It would massively impact markets where the US Treasury is prominently traded and held, i.e. pretty much every financial market around the world.

    • I don’t think the distinction is “hard money” vs “soft money” at all. Categorically not. I think the problem (or one of the problems) is doing monetary policy purely through the financial sector, which enriches the financial sector much, much faster than the rest of society. To lower income inequality, central banks need to find another transmission mechanism that doesn’t solely favour and benefit the financial sector.

      • In a lassez-faire economy, the workers maintain their share of GDP via the Phillips Curve: productivity gains accrue to the workers because employers compete for workers during times of periodic labor shortage. The real wage growth is the same as productivity growth

        With inflating fiat currency real wage growth is obliterated as productivity gains in this accrue to the public sector, which grows exponentially instead.

        If one divides manufacturing wages by CPI, the real wage since 1964 is completely flat. (Actually it has been flat since 1940)

        The worker has been robbed by the public sector, not by robots or cheap imports.

    • From your link: “We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980″

      I don’t think this study goes back far enough to consider other variables, that influence their findings. What are your thought?

  8. This is one of the basic concepts in economics that few seem to understand, that of capital, its production and productive employment.

    There are several reasons that [“good”] jobs [in the traditional Western economies] have been at a premium over the past forty years. Technology is NOT one of them, other wise, and like it has been said a million times, if technology was the cause of lost [net] jobs, then we would have been out of jobs long, long ago.

    When [net] jobs disappear, it is because capital is not being invested in job producing activity, or, it is being invested elsewhere. The story of the past forty years is the story of how the financial sector and the government have siphoned off a great deal of this capital and either stuffed it in their pockets or put this capital to poor use in government projects that could not grow industry, caused asset bubbles, etc.

    The key to creating good jobs again is in freeing-up this captured capital and re-investing it jobs producing activity. This, and only this, will fix the economy. Getting to “this,” will take de-centralization [of industry and government] and de-financialization [of every damn thing], much of what we have talking about on this blog over the past months.

    • I believe “direct” investing in start-ups is happening at a brisker pace. I don’t know the internet sites, but I believe if one has an idea, there are plenty of investors to help, and become mentors/angels/saviours etc.

      This bypasses the TBTF banks.

      • When you live in a world where the ROI is higher for doing activities that destroy the productive economy [again, fraud, theft, financalization, and mal-investment], this is what people do because they approach economic activity with an amoral, self-interested perspective.

  9. Behold the Ultimate TRUTH: The buying power of money is directly related to the cost of ENERGY

    (Look into the “Electric Model of the Universe” it’s the greatest new frontier of prosperity since the discovery of agriculture…. Google It…{:o)

  10. In Aziz’s post he says “And average wages continue to climb nominally, too.”

    Never look at Averages. Look at the Median wage. Averages incorporate Executive Salaries, skewing the data. Always look at Median figures, as this is where the votes are!

    Using Median is more shocking!

  11. Not only that, but look at how much of those wages are simply debt-sponsored [particularly government].

    In this system, it’s all about debt. Back all the debt out of the system, and then you truly understand the real economy.

  12. The core institutions, ideas and expectations that shaped American life for the sixty years after the New Deal don’t work anymore. The gaps between the social system we inhabit and the one we now need are becoming so wide that we can no longer paper over them. But even as the failures of the old system become more inescapable and more damaging, our national discourse remains stuck in a bygone age. The end is here, but we can’t quite take it in.

    http://www.powerlineblog.com/archives/2012/06/article-of-the-year-the-fourth-revolution.php

    • Home schooling and online play break!

      Can you imagine the 18th Birthday party! Friends from all over the world at some exotic resort.

      Social real life interaction can be formed by local sports, scouts etc.

      Need homework assistance, outsource to the 3rd world.

  13. I was chatting with a patient yesterday [an environmental planner, which is a pretty serious deal here in CA], and we were talking about all the layers of rules and regulation and costs, etc., and I told him that I thought that none of these things really got at the core of the problem, which he went on to define as a situation where there is higher concentration of people than that which the environment could safely handle. The solution to the problem is in de-populating. Once the correct number of people inhabited a particular geography, almost all of the environmental problems disappear. Makes lots of sense.

    This is the same problem we witness in our economic system. When the value of money [labor-value] is tampered with, all the fun and games ensue, to the point where the theft has destroyed the very basis of the economic system itself, the ability of the system to generate capital that can be put to productive use.

    So, whereas de-populating does a great deal to fix core environmental issues, getting back to sound money [or preferably, no money at all], solves almost all of the problems which currently plague the economic system.

    Everybody [more or less] understands this, but people can not take that leap of faith that serious change always demands, and continue to walk down the road to Hell, believing that the flames they see straight ahead are simply a mirage [and won’t really hurt that much, anyway].

  14. Pingback: Enlaces de la semana III « Artir contra el mundo

  15. Pingback: Laptop Millionaire Blog » Blog Archive » You Could Be As Obsolete As A Horse

  16. Pingback: Do androids dream of prosperity? | incredulousinvestor

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