What Happens if We Do Nothing?

 What Happens if We Do Nothing?

 

In the 70+ years since World War II, trends in employment and compensation in the United States have become unmistakable.  These trends show a significant increase in income inequality and provide convincing evidence that the “trickle-down” theory of economic growth is simply not valid.

This essay will examine those historical trends and show what will likely result if we take no deliberate action to change them.

Consider the following chart of labor force distribution in the U.S.

Economists often divide our economy into three sectors: Agriculture (which includes hunting, fishing, forestry, and farming), Industry (which includes construction, mining, and manufacturing) and Services, which is conveniently defined to include everything else.  That is nice since it makes the percentages on the above chart add to 100 percent.

 

We see that in 1840 nearly 70% of our labor force was involved in Agriculture.  Since that time, due to automation and the consolidation of small farms, the Agriculture labor force has declined to less than 2% of the total.  And yet we have all the food we need and a nice surplus for export.  Clearly, automation has significantly reduced the need for labor in the Agriculture sector.  But that is not a problem if the other sectors can absorb the workers.  And we see that the percentage in the Industrial sector increased steadily from 1840 to 1950 with a short timeout for the Great Depression.  But then in 1950 the percentage in the Industrial sector also began to decline – mainly due to automation.  All the while, the percentage in the Services sector was rising.

 

So, some sectors lose employment while the Services sector gains employment.  And since the unemployment rate is typically under five percent, everything is fine – right?

 

No!  Everything is NOT fine since the unemployment rate is a misleading statistic.  It is defined as the percentage of workers actively looking for work who are still unemployed.  It does not count those who became discouraged and dropped out of the labor force altogether.  Those dropouts are accounted for in the “labor force participation rate”.

 

 

This diagram shows the U.S. labor force participation rate for men and women – separately and also together.  The participation rate is defined as the percentage of working-age persons who are currently working or are actively looking for work.  For men, that percentage has been declining steadily – from 87% in 1950 to under 70% in 2015.  The only reason our overall participation rate increased after 1950 was the increased participation of women.

The participation rate for women rose from 33%  in 1950 to 60% in 2000 but has declined since then.  The result is that, as of 2015, total labor force participation stands at a 38-year low.

 

So – automation and consolidation drove workers off the farm and out of the factories and into the Services sector.  And while the overall unemployment rate is relatively low, that statistic conveniently ignores the decline in the labor force participation rate.  Unfortunately, we see the situation is even worse when we consider how worker compensation has fared.

 

 

This diagram shows two trend lines.  The one labeled “major sector productivity” has risen steadily from the late 1940s.  The one labeled “real (i.e., inflation-adjusted) wages of goods-producing workers” tracks the first trend line from the late 1940s until the early 1970s.  During that time, increasing productivity and production resulted in increasing real wages.  Labor shared in the increasing prosperity.  Then the wages trend line stopped rising and remained essentially flat to this day in a phenomenon that some economists refer to as “The Great Decoupling”.

 

This raises a fundamental question.  If the real wages of goods-producing workers are stagnant, where is the money going?  The answer is easy to find as the Internet is awash in charts showing the ratio of the wealth of the top 1% versus the bottom 90%.  That ratio has been increasing for decades and now stands at levels not seen since the Gilded Age.

 

But why have real hourly wages been stagnant for over 40 years while productivity continues to rise?  There is a simple answer: supply and demand.  The demand for workers declines when there are less expensive ways to produce the output.  When demand goes down, pay goes down – or, in this case, goes flat for 40+ years.

 

But what are these less expensive ways to get a job done?

The first is Automation and the second is Foreign Labor.  There is considerable debate concerning the relative contributions of these two factors, and certainly, domestic employment has been impacted by foreign labor, but consider these numbers:

 

U.S. Manufacturing Employment*

Jan, 1987 = 17,465,000

Jan, 2019 = 12,825,000

 

U.S. Real Manufacturing Output (2012=100)**

Jan, 1987 = 63.155

Jan, 2019 = 105.469

 

*Source: Bureau of Labor Statistics

**Source: Federal Reserve Bank of St. Louis

 

Between 1987 and 2019, our domestic industrial employment decreased by over 26%, while our inflation-adjusted manufacturing output increased by 67%.  Therefore, our manufacturing output per worker more than doubled during this time.  This is domestic production, so the reduction in workers was due entirely to automation.  The result was a loss of many well-paid jobs.

 

This loss of jobs to automation isn’t just happening in Agriculture and Industry.  Many well-paid jobs in the Services sector require considerable skill and training.  However, many of those jobs involve routine, repetitive work that can be done by computers.

 

The loss of well-paid jobs in the Industrial and Services sectors has resulted in a hollowing out of our middle class.  The jobs that remain are increasingly those that require high levels of skill in non-routine tasks or those requiring lower-skilled manual work that is not yet automated.  The result is often described as a “barbell-shaped economy” consisting of CEOs and “burger flippers” with ever fewer middle-class jobs in between.  This leaves us to wonder what we can expect of the future.

 

The jobs on the low-paid end of the barbell often require rote sequences of pattern recognition followed by manual manipulation.  For example, preparing a burger consists of recognizing ingredients (bun, meat patty, condiments, etc.) followed by manual manipulation and combination of those ingredients.  The same is true for retail store stock clerks, checkout clerks, warehouse workers, truck drivers, janitors, etc.  Such recognition and manipulation are usually trivial for human workers but surprisingly difficult for machines.  However, recent advances in artificial intelligence – especially in a sub-field called deep learning – have led many to predict that machines will be capable of such work in the next ten to twenty years (V11, V4, B3, B6).  When that happens, the low-paid end of the barbell will also disappear.

 

At that point, it will be evident that retraining and “upskilling” the displaced workers will not be enough.  Many will be unable to absorb the necessary training, and there is simply not enough room for everyone on the remaining end of the barbell.  The world simply does not need that many CEOs, college professors, and rocket scientists.  In that world, most of our workforce will see little demand for their services, and their wages will decline or disappear to reflect that.

 

We now have an answer to the question, “What happens if we do nothing?”.  That answer is straightforward:  The majority of our economic output will be due to automation and computerization, and the portion of our GDP going to labor will be at all-time lows and falling.  Further, our productive capacity will be in the hands of ever fewer owners of capital equipment.  Such consolidation will inevitably result from the economies of scale available to large companies.  This consolidation will result in ever-increasing income going to ever fewer people.

 

Ever-increasing levels of income inequality are not sustainable.  Society should not and will not tolerate a winner-takes-all economy.  The primary question will be how to prevent that result.

 

The answer to that question is also straightforward.  Society must recognize that the productive capacity of a modern economy is not due just to the efforts of business owners and investors.  Much of it is also due to the enabling effects of our societal infrastructure.  That infrastructure consists of society’s accumulated knowledge and technology and our physical, educational, legal, and even military infrastructure.  That infrastructure belongs to the public, and every citizen owns an equal share of it.  Business owners and highly paid individuals must accept that a non-trivial portion of their income is due to that infrastructure, and they must pay a fee for its use.  That fee would then be distributed as a Universal Basic Income or UBI.

 

A properly implemented UBI can provide each citizen a livable income while still providing sufficient incentives for business owners and investors to do what they do so well.  Reducing income inequality in this way will also reduce calls to slow the automation of our economy.  The efficiencies that come from increasing automation will also increase economic output and UBI payouts.  That complementary relationship will benefit everyone.