The X-factor for Unemployment Rates

With unemployment staying fairly high and steady, despite massive economic stimulus, many are wondering what it will take to create more good jobs in America.  One explanation is simply that the fastest growing and most innovative American firms simply don’t need all that many employees.  Even industries that have historically needed lots of workers are becoming automated.  An excellent book that explores this theme is Race Against the Machine, by two professors at MIT.  An article that provides a summary of the book’s thesis is available here.

You don’t have to look very far to see entire industries that have had massive reductions in the number of workers required to perform their operations.  Consider the travel industry before Expedia and Kayak.  When you wanted to book a ticket, you called a human travel agent.  Consider the brokerage industry before online trading.  How many people actually call a human stock broker to place a trade anymore?  Every time you use an ATM machine, a scanner to tally up your purchases at a grocery store, or a check-in kiosk at the airport, you are seeing jobs that have been permanently displaced.

How many bookkeepers have been replaced by Quicken and related software?  How many tax preparers have changed careers as a result of TurboTax?  In the mass media, the impacts of technology are far-reaching.  As people move to e-books and electronic media, there are entire supply chains that no longer exist, with a corresponding loss of jobs.

The authors of Race Against the Machine note that these changes have the effect of directing a higher fraction of an enterprise’s earnings to capital (shareholders) rather than to labor.  As the recovery from the great recession has progressed, corporate earnings have increased rapidly while the fraction of corporate income that went to paying employees has fallen to its lowest level since the mid 1960’s.  Henry Blodget assembled a series of charts that document these trends here.

The potential long-term impacts of this trend are huge.  What will happen to all of the workers whose jobs are replaced by automation of one form or another?  This is the major outstanding question for the long-term recovery of the U.S. economy as a whole.  Low interest rates may stimulate the economy by encouraging businesses to borrow to expand, but they may be investing in technology rather than increasing employment.  Low rates make it possible for people to refinance their homes or other debt, but there is not necessarily a consequent increase in employment.  While all the media attention seems to be focused on what the Fed will do, the real issue for the vast majority of Americans is how to find meaningful, sustainable, well-paying jobs.  Technology has improved our lives in many ways, but we must acknowledge that the benefits also come with a cost: fewer jobs overall.

On a final note, Detroit’s recent bankruptcy filing is related to the long-term impacts of jobs displaced by automation and is a crucial case for understanding the complex relationships between workers, investors, and technology.  I will explore this theme in a future post.

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