10 Innovation and Labor Market
Jessie Martinez
Economic Labor Theory predicts that the value of a worker is based on their Marginal Revenue Product (MRP) which is determined by the worker’s productivity and the value of the output they are producing. The simple rule is that employers will hire if the MRP is greater than the cost to employ them (i.e. the wage). We know that technology can be complementary to labor increasing productivity which makes humans more productive. Thus, the reason a machinist using physical capital is paid $40 an hour to produce a part where someone else producing by hand is paid $5 a day. However, technology can also be a substitute and eliminate the need for humans. Think self-check outs eliminating the need for a cashier. As robotics and artificial intelligence (A.I.) become more sophisticated and less costly to produce, the concern is that it will become more economical to replace humans with robots throughout the economy. The result is that humans will have to be willing to work at lower wages to be competitive. Some in congress believe that this transition, while likely inevitable, can be managed with the institution of a robot tax. A business employing a robot in their production process would need to pay a tax for that choice. The robot tax would even the field a little bit increasing the cost of employing a robot thereby providing an incentive to instead hire a human at existing wage.
Historical Evidence
There have been four industrial revolutions that have significantly altered society. The first industrial revolution (1760-1840) transitioned from manual labor to machine based production, the second (1870-1914) brought electricity and combustion engine, the third (1969-2000) electronics, computers, and nuclear power, and finally the fourth (2000-today) Robotics and A.I.
Studies show during the first industrial revolution that Real GDP (output) per person increased 39% , however real wages grew more slowly.(Crafts) Wages initially declined during the early part of the industrial revolution (1760-1780) with most gains not apparent until latter stages (1830-1840).(Horn) Real wages declined as machines replaced human power (substitution) until new methods of production that leveraged human skills (complementary) or new human based outputs were created. While wages initially declined the increased productivity meant there were a plentiful supply of goods that were accessible. Goods that in the past would have been reserved for the rich like coffee, chocolate, and clothing (Horn). Families were willing to work more hours to gain access to these goods. In 1851 British census, 36 percent of children worked. The average Brit labored 50 hours a week in 1760 and 61 hours in 1850 (Horn). From 1760 to 1850, consumption increased 75%. Wages fell, but there were more items to purchase, so people were willing to work harder and longer to have access.
Not all sectors of the economy were impacted in the same manner. For example, if you were a skilled potter the machinery allowed you to be more productive and therefore more valuable. However, if you were a British handloom weaver the machine initially makes you valuable but then replaced you.
1780 37,000 weavers employed at average wage of 75 a day
1820 240,000 weavers employed at average wage of 276 a day
1830 43,000 weavers employed at average wage of 75 a day
(Crafts, P7)
What about today?
A recent study showed that during the period 1990 – 2007 each additional robot added in manufacturing replaced 3.3 workers nationally on average. The study also found that the increase use of robots lowered wages by 0.4% during the period. (Dizikes)
Another study showed that regions with increased robot exposure increased number of hours worked to maintain annual income and increased borrowing. (Osea)
In general, these studies find the same pattern during industrial revolutions. The initial impact of new technology like A.I. is to displace labor, but over time the productivity growth creates new market demand. People still want more stuff, it will just be different. New markets will be created that rely on skill sets where humans have comparative advantage over machines. In 1920 32% of labor force worked on farms, today it’s less than 2%. The economy is in constant change and the fourth industrial revolution will accelerate. Will you be worse off or better off with these changes?
Questions:
- What on average happened to the wages of workers and the level on consumption during the first industrial revolution?
- Are the anxieties of workers (i.e. Luddites) in early 1800’s similar to the feelings of todays workers? Provide some examples where you see similarities?
- Describe three jobs that have been eliminated due to technology. Has the increase in efficiency from technology allowed you to consume the output, previously produced by those workers, at a greater level without them?
- Do you believe that society would be better to tax robots when they are employed in production for private business? Please explain you answer.
- Do some research. What are some of the new jobs and skill sets experts predict will be in demand in the next ten to twenty years? Which “new” job might you be interested in pursuing?
References:
Berg, Andrew and others. (2018) “Should we fear the robot revolution? (The correct answer is yes)” WP/18/116 International Monetary Fund. https://www.imf.org
Crafts, Nicholas. (2021) “Slow real wage growth during the Industrial Revolution: productivity paradox or pro-rich growth?” V74, I1 Oxford Economic Papers. https://academic.oup.com/oep/article/74/1/1/6145336
Dizikes, Peter. (May 4, 2020) “How many jobs do robots replace?” MIT News office. https://news.mit.edu/2020/how-many-jobs-robots-replace-0504
Horn, Jeff. (2007) The Industrial Revolution. Greenwood Press. Connecticut, USA
Osea, Guintella and others. (2022) “How do workers and households adjust to robots?: Evidence from China.” WP30707 National Bureau of Economic Research. https://www.nber.org/system/files/working_papers/w30707/w30707.pdf
Raffety, John. “The rise of the machines: pros and cons of the industrial revolution.” The Encyclopedia Britannica. https://www.britannica.com/story/the-rise-of-the-machines-pros-and-cons-of-the-industrial-revolution