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Markets and Economy

Automation’s Effect on Wages

Technological advances significantly boosted labor productivity and wages for decades. As the latest wave of technology hits various sectors of the economy, why isn’t it bringing the same benefits for workers?
Jim Glassman, Head Economist, Commercial Banking
August 9, 2017

For previous generations, technological progress was linked to rising wages. Advances like telecommunications made workers more efficient, sending productivity and pay soaring. In a break from the past, the newest wave of technology—specifically artificial intelligence and automation—may now be contributing to labor’s shrinking share of the economy.

Why Labor’s Share Has Shrunk

Labor productivity has risen relatively slowly throughout the economic recovery, and wage growth has been sluggish as a result. Technology isn’t entirely to blame, as a number of factors are driving this trend:

  • Mismeasurement: The methods used to measure production are likely undercounting several important new sources of productivity, especially in the digital economy and e-commerce.
  • Tame inflation: While nominal wage growth has been anemic compared to previous business cycles, inflation is also low by historic standards. Wages are still relatively weak when adjusted for inflation, but to a less unusual extent than nominal figures suggest.
  • Hidden labor market slack: Wages may not be growing quickly because full employment has yet to arrive. Despite today’s 4.3 percent headline unemployment rate, the labor market still retains considerable slack, including millions of involuntary part-time workers and discouraged workforce dropouts. A more comprehensive measure of unemployment suggests a rate closer to 5.5 percent. Wages should grow more quickly as the job market continues to tighten.

Still, these temporary cyclical forces can’t explain the long-term erosion of labor’s share of the economy. Over the past 20 years, the percentage of GDP paid as wages has steadily declined. From the 1960s to 1990s, labor income accounted for between 61 percent and 67 percent of GDP. Since 2000, that share has declined, reaching a low of 57 percent during the recession before rebounding to about 59 percent today.

Economists have offered several explanations for the dropoff: the decline of unionization may have undercut workers’ leverage in wage negotiations; globalization has hurt low-wage industries like textile manufacturing; and deregulation has pushed down wages in some previously protected sectors. But a recent study by the International Monetary Fund found that automation is the largest factor driving this trend. Across the board, industries in which routine tasks have been automated have seen the largest decline in labor’s share of income.

Is Today’s Displacement Different?

New technologies have always displaced workers; but in the past, they also created new opportunities. For example, while the invention of the backhoe allowed a single-skilled construction operator to replace an army of shovel-wielding ditch diggers, the laid-off workers benefitted from the construction boom made possible by mechanization.

But what happens if the backhoe becomes automated? Its displaced operator may find that the construction industry of the future will need fewer laborers. Construction sites may be populated entirely by self-guided machines, with only a handful of workers overseeing the equipment.

In the past, when professions were affected by technology, new lines of higher-paying work often emerged. Automobiles destroyed demand for farriers and stable boys, but cars required mechanics and filling stations. But this may no longer be the case. The US manufacturing sector, which is at the forefront of automation, presents an ominous trend. Total production is at an all-time high and worker productivity is through the roof, but employment has fallen precipitously. Technology has made the sector far more productive, but it hasn’t generated new opportunities for displaced workers.

As robotics begin to automate tasks beyond the factory floor and artificial intelligence takes over jobs once reserved for white collar professionals, more sectors may follow manufacturing’s pattern of rising production and falling employment.

The Policy Dilemma

Skeptics may claim that the coming wave of automation isn’t unprecedented. It likely won’t be as disruptive to the economy as the original industrial revolution, but we should remember the tremendous social and political upheavals that accompanied urbanization and industrialization in the early 20th century. New policies will be required to navigate the coming change.

Already, many activists believe that automation will require expanding the social safety net to include universal basic income, a guaranteed paycheck to provide for people whose labor is no longer valued. But this proposal risks creating a permanent underclass of unskilled workers who are separated from the workforce.

Instead, it would likely be more beneficial if the safety net supported displaced workers searching for new ways to create value in the changing economy. This would involve training workers who switch industries and encouraging the emergence of new professions. Work and productivity may look radically different in the future, but we should preserve avenues for everyone to contribute to the workforce.

View our economic commentary disclaimer.


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