Arnold Kling writes
Yes, there is technological unemployment. Russ [Roberts] continues,
Somehow, new jobs get created to replace the old ones. Despite losing millions of jobs to technology and to trade, even in a recession we have more total jobs than we did when the steel and auto and telephone and food industries had a lot more workers and a lot fewer machines.
Re-reading the first sentence, with its passive voice, I can almost feel his hands waving. The PSST story is that entrepreneurs must figure out how to reallocate resources when productivity rises faster than demand in some industries. I want to suggest that it can be a very difficult process. As labor gets more specialized and production processes become more roundabout, large adjustments require more steps.
Here is the core issue in my mind: why isn’t this process made simple by price adjustments. Its clear that it might be difficult to find a way to utilize labor that was just as productive as the method used before technological innovation.
However, if the wage falls low enough then there should be lots of value add that could be done.
Taking this to the extreme makes this point clear.
Suppose that Michigan autoworkers lost their jobs and their wages fell to One Cent per Year. Well at One Cent per Year I could hire armies of men to scrub my house by hand, to take out the garbage, to walk behind me recording every thought I had and double checking that every appointment was made and kept.
At one cent per year there are millions of extremely easy uses and worthwhile uses for labor.
If we accept that the labor market would clear at One Cent Per Year. Then the question is why has the labor market not cleared while at the same time the wage has not dropped to One Cent Per Year.
There are lots of reasons why we can think that this hasn’t happened but this is – at least in my mind – the central question. We know that we can profitably employ everyone in America at some wage. So why is there a prevailing wage at which people are not employed?
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Wednesday ~ June 22nd, 2011 at 1:49 pm
Pseudo-Name-JMK
Great question, seems related to a question about the Production Possibilities Curve (PPC) in relation to technological changes that simultaneously un-employ workers.
Has the neoclassical assumption been that technological advances push the curve outward, given that resources (labor) will be employed elsewhere in the economy? But aren’t there some workers who have been replaced by technology and will never work again?
Is such an occurrence taken into account in the expansion of the PPC or is it a given that all resources have potential to be utilized, regardless of labor-skill obsolescence? Clearly, we currently are not on the frontier of the PPC.
Wednesday ~ June 22nd, 2011 at 2:50 pm
Eric Morey
I’d rather starve doing whatever activity my malnourished brain finds most appealing, than doing whatever menial task someone else would like me to do in exchange for not enough sustenance. As long as there is sustenance, there is much value to my leisure time. Your job offer must clear the bar of that value level over every time horizon.
Wednesday ~ June 22nd, 2011 at 5:24 pm
Lord
There is the question whether we are demand constrained (money) or supply constrained (oil) though. A bit of both I would guess.
Friday ~ June 24th, 2011 at 1:18 am
lark
I would guess, from this question, that you came from a quite sheltered environment. One without gangs, visible drug dealing and prostitution. For if you had lived in such an environment, you would have more understanding of the world of the poor. Once you fall through the a level of decency that a job (a ‘decent’ job) will support, you actually have many options, but many of them are not legal. The truth is a life of crime is preferable to 1 cent per year. So is immigration. So is welfare. Try to imagine this: you do not have enough money for food, shelter, health care, or transport. But many people do have money, even too much. The problem is not how to work, but how to take it from them.
This is not fundamentally because the poor lack decency, but rather that we as a society do not do whatever it takes to create the jobs that offer (‘decent’) alternatives. Bill Gross has an interesting take on that:
http://www.nakedcapitalism.com/2011/06/bill-gross-bond-vigilante-minsky-convert.html
I am curious as to whether you consider yourself libertarian. In my experience libertarians without exception are unexposed to the rougher edges of life. No Thug Life for them.
Tuesday ~ June 28th, 2011 at 5:09 am
andrewlainton
Karl, no-one will rationally work if the wages they receive are less than the costs of purchasing energy from food equal to the energy expended working, and of course getting to work and sleeping, because you have to be alive to be an employee.
So wages will never fall to a cent, workers have to be better off than their current position not working, they need to cover there costs of working, eating, sleeping (housing) and getting to and from work before they have a cent of disposable income. It not like the nonsense Robert Lucas spouts of most unemployed workers enjoying being unemployed, neither is ‘sticky’ wages the key issue, rather it is wages cannot be infinatessibily adjustable downwards for these physical reasons.
This is one issue that the marginal productivity theory of wages cannot deal with, and to my mind it is a black swan issue showing it is irretrievably flawed.
The founders of classical economics, Petty and Cantillon understood this, food reproduction costs and transport costs set a floor on wages (and create the basis of rent but that’s another story).
If no business processes require skilled labour and there was an infinitely elastic supply of labour it is fairly easy to show that competition will bring down wages to this ‘reproducibility’ level – Ricardo was right.
If there is a requirement of types of labour that are in short supply it is also fairly easy to show that this results in quasi-rents on that element of wages.
Finally although there may be a range of jobs available a worker with no savings may be forced to take the first job available. They in effect are insuring themselves for the minimum period of the contract against the risk of being forced back to subsistence, This accounts for a gap between quasi-rents and marginal productivity. This level also depends on the interest rate (so there are labour fallacies as well as capital fallacies in neo-classical theory).
Add up all three elements and they fully account for wages, and each has completely different dynamics and is explained by different equations.
Wages are not set by marginal productivity, rather marginal productivity is an ex post residuum of the decision to expand or contract production, and the additional doses capital/labour ratio needed to do so given the productivity and costs of a particular technique.Because capital and labour are indivisible in such decisions the marginal theory of productivity contains a hidden assumption, a hidden capital theory fallacy.
Decisions on employment are of course marginal but the marginal theory of productivity is just plain wrong because it tries to squeeze three different margins into one.
This is too long already to deal with the PPC related issues,
Saturday ~ July 2nd, 2011 at 9:45 pm
Eric L
Besides the question of whether anyone would work for that wage, there are a few other economic issues with lower wages as any sort of solution. The army of 1 cent workers would put downward pressure on the wages of those who would have been employed, and lower wages would lower the aggregate demand for labor — I’m not saying we’d be at a lower point on the curve, but the curve itself would be lower, which works against job creation. Because you know who can’t afford to pay someone 1 cent to per year to build them a car? Someone making 1 cent per year. Lower wages, deflation, and greater inequality are not a solution. Everyone in servitude to the small handful who still have money is not an economy to aspire to.