Jobs, technical progress & productivity

Tim Worstall writes:

The aim, point, and process of economic advance is to kill jobs— to get the task done with the use of less human labour…Economic advance is about using less labour to do any one task. This is why we obsess over productivity. It’s not so that we can gain more from the same amount of labour either. It’s so that some labour is freed up to go and do something else, which is the important matter.

This was true once, but it’s more questionable now.

To see why, let’s take a simple example*. Imagine there are two sectors in the economy, each employing 100 people. Sector A produces 100 units (productivity is one) whilst sector B produces 300, so total output is 400. Now imagine that sector A sees technical progress so that those 100 units can now be produced by just ten workers. The other 90 go to work in sector B.

In this example, output rises to 670 units. That’s growth of 67.5%. And because those 90 workers are more productive in sector B than they were in sector A, their real wages are higher.

This demonstrates Tim’s point. Labour in sector A is freed to do something more productive. That’s progress.

This is not a contrived example. You can think of it as being a simple description of the shift from agriculture to industry in the 19^th century west or in China more recently. Workers stopped working with spades and hoes as agriculture became mechanized and moved into factories where they worked with more machinery and so were more productive.

Let’s consider another example. Again, we start with 100 workers in sector A and 100 in sector B. The difference is that this time sector B is a low-productivity sector; it produces only 50 units. Now imagine that sector A becomes fully automated so its 100 workers must move into sector B. Total output now rises by only one-third. That’s half the rate of my first example. This is despite the fact that technical progress in sector A is faster in this case than in the first.

Note that I’m conceding a lot to Tim here, as I’m assuming full employment.

And here’s the thing. Just as my first example was reasonably realistic, so is the second. It’s consistent with a point Acemoglu and Restrepo make – that any incipient downward pressure on wages due to workers being displaced by technology can be offset by employers having an incentive to create low-productivity jobs.

You can think of the displaced workers in this example as being those in good manufacturing jobs who have to take less productive work in shops or call centres.

Alternatively, because trade and technology are essentially the same things (as David Ricardo pointed out) you can think of this example as a stylized description of the impact on US manufacturing of trade liberalization.  Yes, the economy is bigger in period 2 than in period 1. But those workers who moved from sector A to sector B saw their productivity halve – and by extension their real wages. This illustrates Dani Rodrik’s point (pdf) – that even if globalization has net benefits, it can also have awkward local effects (pdf)**.

My point here is merely that technical progress and destroying jobs are not sufficient to achieve good economic growth, even where markets are functioning well. As Daniel Cohen says: “if a worker’s individual productivity does not increase, growth is necessarily weak.”

* I’m borrowing here from Daniel Cohen, who in turn borrowed from Alfred Sauvy.  

** My example overstates the actual effects of globalization, which has been only one of many causes of increased inequality (pdf).

Comments

[SpotTheFlaw]

The maths doesn't add up.

"their productivity halve – and by extension their real wages"

Total income equals total output. Sure, if you assume that the robots start producing half of GDP and that we can't consume the half of GDP the robots produce then living standards will fall.

Otherwise the half of GDP the robots produce is still consumed, and real INCOMES still rise.

The argument is just dumb Luddism writ large. Did we consume LESS food when the robots (tractors) started digging it out of the ground rather than teams of 12 year olds?

Just add in some of the more conspiracy theory assumptions to make it work maybe, it's inequality///rich capitalists consume all the robot output///evil foreign investors consume all the robot output!!!

[Luis Enrique]

"But those workers who moved from sector A to sector B saw their productivity halve – and by extension their real wages"

Tim Worstall does not care what happens to losers

[Quite Likely]

SpotTheFlaw, you're sort of ignoring that this is a distributional issue. The automation does increase productivity, but it shifts much of the benefits from a mass of decently paid workers to a small number of robot owners / capitalists. That's a problem in itself for the increase in inequality, and what we've seen is that it also ends up contributing to the demand shortfall since the already rich have a lower marginal propensity to consume rather than save the extra income they get.

[SpotTheFlaw]

"SpotTheFlaw, you're sort of ignoring that this is a distributional issue"

God I hate arguing on the internet.

No, I am pointing out the clear assumption that Chris is making: living standards fall because robots are now employed to produce output WHICH THE WORKERS DO NOT CONSUME. It has to disappear into thin air in this example to get the result Chris wants.

You want to pretend this is in any way a realistic example, then please come up with lots of examples from history where capital is employed to replace labour and everybody stops consuming the output produced.

Before we talk about a "shortfall" in demand let's get the GDP equation to balance, and then maybe move onto A-level-standard econ.

[Ahmed]

@Quite Likely,

"The automation does increase productivity, but it shifts much of the benefits from a mass of decently paid workers to a small number of robot owners / capitalists."

Kind of like farmers when they replaced labor with farm machinery.

Oh wait, last I checked, farmers are struggling...

No, the benefits of automation always flow through to consumers.

[Tim Worstall]

"No, the benefits of automation always flow through to consumers."

http://www.nber.org/papers/w10433

The entrepreneurs (note, not quite the same as the financiers) get some 3% of the increased value created. Near all the rest flows through to consumer surplus.

The idea that the capitalists get all the gains requires that there be no competition in the economy.

[G]

Spot the Flaw

He's assuming the money the robots make doesn't go to the workers.

He gives examples and links to more.

He admits net benefits overall...

Read the thing!

[George Carty]

"The automation does increase productivity, but it shifts much of the benefits from a mass of decently paid workers to a small number of robot owners/capitalists."

Not so much to robot owners (owning capital goods such as robots does not enable a business to command super-profits) as to those who own the intellectual property on which the robots are based, as well as to landowners (as the money consumers save on products made cheaper by robots can be ploughed into the land market).

[Luis Enrique]

Tim Worstall does not care about empirical evidence concerning wage stagnation, rising market power and what share of the gains have been captured by the capitalists

[andrew]

The model is correct as far as it goes.
There is one thing - it does not go very far.

The whole basis of human progress is that there is more stuff than you need in aggregate.

If this is not true you end up with
Sector A(griculture)
and the number of people in that col falls until there is enough food.

If there is more stuff than you need then people sit around and one of them comes up with a way of making their life better that is not in Col A.
As it is more productive other people do similar things and now we have Col B with a growing number of people in there.

Later on you see Col C / D / E....

At some point people in one Col M(anufacturing) may do something that dramatically reduces demand for labour in Col A. This undoubtedly will cause dislocation and distress to the Workers in Col A but it is not inevitable that they end up doing crap jobs.

My point is that as long as there is excess stuff and people are not working all the time, more columns are being added.

It is not preordained that workers move to less skilled jobs.

I would say it is a outcome of culture and regulation.

Those who migrate (physically and intellectually) will do better
and
The govt could have helped those left behind retrain and brought more businesses in.

[Tim Worstall]

"Tim Worstall does not care about empirical evidence concerning wage stagnation,"

Tim Worstall has been arguing for some years now that real wages are rising strongly. As Hal Varian has said, GDP doesn't deal well with free. And when WhatsApp is recorded in GDP/wages/productivity numbers as a *fall* in productivity then it's obvious that something is wrong with our method of counting, no?

In fact, we o actually know that real wages are rising faster than the usual numbers show. The only argument is over how much faster.

[Luis Enrique]

Tim Worstall will grasp at any straw

[Blissex]

«The entrepreneurs (note, not quite the same as the financiers) get some 3% of the increased value created. Near all the rest flows through to consumer surplus.»

Hahaha! Which "consumer"s? This is a classic clever misunderstanding often used by vociferous heralds: the use of aggregates that have special meaning in Economics that do not correspond to ordinary meanings.
For example indeed "consumers" have captured most of the productivity improvements from oil, but "consumers" includes rentiers and the top 1% and the top 0.01%. "Consumers" here does not mean just the people struggling to pay rent at the end of the month.

«The idea that the capitalists get all the gains requires that there be no competition in the economy.»

Because rentiers don't exist, and there is ample competition in the offer of housing in the few areas where there is a good supply of jobs... Or not? :-)

«Tim Worstall has been arguing for some years now that real wages are rising strongly. As Hal Varian has said, GDP doesn't deal well with free.»

Tim Worstall seems to me to have been arguing that aggregate "ofelimity", as he specially defines it, has been rising strongly, and then he seems to me to be cleverly switching words to "real wages" as if they were the same as aggregate ofelimity.

As to the material standard of living of the bottomost 50-7% of the population in most OECD countries it does not seem to have risen significantly for several decades, and for many it has fallen substantially (e.g. much smaller houses, much greater job insecurity, lower quality of life and goods, much higher bills).

Sure, many people are reading their smartphone instead of a newpaper or a book during their commutes, but how much extra "ofelimity" does that give them?

[Blissex]

«smartphone instead of a newpaper or a book during their commutes, but how much extra "ofelimity" does that give them?»

The trick the buffons use, for example the practical jokers at the BLS in the USA like, is to take an earlier cellphone/TV that cost $1,000 point out that currently the same functionality can be delivered by a $100 cellphone/TV and assume that therefore its "ofelimity" has increased 10 times.
Here L Summers comments sardonically on such clever techniques:

“the extent to which differential productivity growth characterizes our economy is, I think, sometimes underappreciated. The Bureau of Labor Statistics normalizes the consumer price indices at 100 in the period 1982 to 1984. Below are some recent values of the Consumer Price Index (CPI) for 2012. ... Television sets at five stand out. That is obviously a reflection of a rather energetic hedonic effort by the Bureau of Labor Statistics.”

or J Stiglitz here:

“Likewise, quality improvements – better cars rather than just more cars – account for much of the increase in GDP nowadays. But assessing quality improvements is difficult. Health care exemplifies this problem: Much of medicine is publicly provided, and much of the advances are in quality.”

So in that sense “real wages are rising strongly”.
As to “GDP doesn't deal well with free” indeed: losses of “free” stuff like unpolluted air and water, uncongested areas, job security for many, the single wage earner family, council housing for anybody, have not been reflected in GDP.

[Swami]

We can all agree that economic dynamism creates not just winners, but losers as well — all change creates relative or absolute losers. But the larger argument is compared to what?

Compared to resisting change, embracing economic dynamism is vastly superior over the medium term and unimaginably better long term for pretty much everyone.

Societies have thousands of years of experience with change resistance. The net result in thousand of societies across hundreds of centuries (a lot of empirical results) is zero long term improvement in human welfare. Zero point zero.

The classical liberal experiment which really took off after Mr Smith wrote his philosophical treatise on economics, resulted, for the first time ever, in an amplification of prosperity even across an increase in population. Population levels increased tenfold, lifespan and health more than doubled and median incomes went up THIRTY FOLD. In addition, the surpluses of the economic productivity could be used to fund safety nets to mitigate shorter term losses on those harmed by change and dynamism. The greatest win win situation in history.

More recently, the data shows that median incomes in the US have increased 40 to 60% since 1980, despite tens of millions of immigrants who pull the statistical average way down. Globally, the gains are even larger and much more significant, with more people (about a BILLION) emerging out of severe poverty in the latest generation, and with the highest gain in global median incomes ever. Even global inequality has been dropping (for those caring about that stat).

In summary, change creates losers. Economic dynamism is a form of change. But repressing economic dynamism is unimaginably worse at creating losers and killing off improvements to human welfare.

[Reza Stephen Lustig]

Swami

Please define "resisting chains," and "repressing economic dynamism." Do you mean outlawing technological innovation? If so, I don't think you have much to fear; nobody but Unabomber-esque primitivists want to do away with modern industry.

It's almost as if there IS area between modern neoliberal capitalism and The Great Leap Forward.

[Swami]

Reza,

The change and dynamism I was referencing were those related to the destruction of jobs as mentioned repeatedly in the article. Global and US median incomes have gone up considerably and both are currently the highest ever. Globally, the last generation even saw the fastest growth rate!

Thus the larger net movement is clearly NOT toward lower productivity or lower productivity jobs. The author's argument lacks substance and is completely contradicted by reality.