“[Hold] down labor power, spread underemployment among more people, reduce labor share by 5%, mute investment and increase inequality.”
Who did those things, how were those things done, and how can they be undone?
Ideologies are not policies.
What policies caused the problem, and what policies can fix it?
Who’d have guessed that Henry Ford knew what he was doing when he raised his employees’ wages?
Are automated jobs calculated in labor hours? If not, how much would you attribute the reduction in labor hours on balance sheets to the transfer of labor from humans to automation?
I would imagine the explosion of software as a service, mobile apps, 3D printing and overall advancements in IT have contributed in the reduction for the need in human labor. Any thoughts as to how these factors may be influencing inequality??
why don’t we know now how many people have been marginalized? What happens with normalization?
Thank you Edward. I appreciate this website’s responsiveness to their readers. Very refreshing. I’ve been trying to find material on the internet on the economic implications of automated labor and overall artificial intelligence but haven’t really found any site that’s as informative or articulates as well this site. If you have an recommendations, that’d be appreciated.
Paulina, I think there is a difficulty in separating cause from effect. When machines perform those functions previously done by manual labor, the demand for that labor goes down, and labors’ negotiating position is undermined.
Conversely, when labor costs are artificially inflated (as by Minimum Wage laws and payroll taxes), the cost balance shifts toward machinery. As an absurd exaggeration of that effect, let’s say I can hire men with shovels for the Minimum Wage of $7.50 per hour, and the cost of a backhoe is $500,000 and an operator is $20 per hour. It might be more cost effective to just hire day laborers as I need them. If I were to buy the backhoe and hire an operator, I would be paying the loan and his salary even when there is no work for him. (It’s harder to hire skilled labor, so I need to keep paying him even on days the weather does not allow him to work.)
Now, raising the Minimum Wage to $15 per hour would double the cost of hiring men with shovels, while the cost of the backhoe and operator would go up little, if at all. (I’d probably have to pay him $25 per hour.) Now, taking a loan out for a backhoe looks twice as good as it did before.
As more immediate examples, go into your grocery store, or into Home Depot. Go to the gas station (excepting New Jersey, of course). What happened to the tellers? What happened to the grease monkeys? Automation put them out of work.
The question is, did the automation put them out of work, or did the increase in the Minimum Wage make that automation a better deal for the owners?
Oddly enough, the desire to increasing productivity is a valid reason for favoring a higher Minimum Wage. A higher Minimum Wage would force businesses to buy mechanical and electronic replacements for labor, thus increasing per-worker productivity. That would, in turn, reduce labor share even more, and thus collapse wages closer to that minimum, all while pricing more “marginalized” workers out of a job.
“[We] are already very near full-employment.”
I do not agree. Our labor force participation rate (in the 25-64 age group) is 6% lower than that of Germany (76.9% here vs 83.1% there).
We are just above average for the OECD (76.8%).
“You do not understand the social costs of labor. Your analysis only looks at private costs.”
No. I just see the social costs of permanent unemployment to be much higher than you do. Tell me, how is the social cost of an employed person, who can now look forward to moving up the economic ladder, if slowly, higher than that of someone who will never be able to get a job because the government priced an entry-level job out of his reach?
“So your analysis ultimately fails in the larger picture of creating a better standard of living for society as a whole.”
Do the people you crush on your way to a better standard of living not matter to you? While it may be a little better for the 80%, it’s a lot worse for the 20%.
We need government investment to increase, I see that as the best policy option right now period.
” Oddly enough, the desire to increasing productivity is a valid reason for favoring a higher Minimum Wage. A higher Minimum Wage would force businesses to buy mechanical and electronic replacements for labor, thus increasing per-worker productivity. That would, in turn, reduce labor share even more, and thus collapse wages closer to that minimum, all while pricing more “marginalized” workers out of a job. ”
It’s pretty dumb for a sophisticated , modern economy like ours to be ensnared in that Catch-22. We should all benefit by the advance of labor-saving technology , but because of ideological blinders , we’re unable to adopt the policies that would allow the win-win proposition to prevail.
When robots displace workers , workweeks can be reduced to maintain employment levels at reduced per-worker hours. Progressive taxation and benefit policies can maintain wages and the overall distribution of incomes at any level we choose. Put simply , everything is a policy choice , or it would be if it weren’t for all of those obstructionists who worship at the altar of that benevolent , free-market God , The Invisible Hand ( aka The Tooth Fairy ).
Let’s not forget, as my Henry Ford comment suggested, that all that efficient industry needs someone to buy its products and services. Robots don’t buy much.
Uh, Ed it is called commodity deflation. Core inflation is rising. Total inflation is declining.
Warren, stop making that mistake. Why did wages spike in the 3rd quarter? EPOP is badly flawed.
If I understand it correctly, interest rates depend on an anticipation of future conditions. How can interest rates rise when neither lender nor borrower can reasonably expect the borrower to have more income later than he does now?
It seems reasonable to think that higher interest requires higher inflation, and higher inflation requires higher wages, (unless supply is falling, in which case inflation will rise, chasing fewer goods and services.)
So, in a prospering economy, you would need
— sufficient supply at feasible prices
— gradually increasing wages, which create
— gradual inflation, which creates
— interest rates slightly higher than the rate of inflation.
As in a hydraulic system, it is not the absolute values, but the differentials between wages, interest, and inflation which move fluid through the system.
If prices become unfeasible and if wages stagnate, then neither inflation nor interest rates will increase. And in fact, this is what we have seen.
Edward, thank you for those papers. They made very interesting reading. I really don’t see either as being any use in optimization theory, since they neither provide any metric to optimize, nor define how to hold all other variables constant while changing the Minimum Wage, nor define how to modify the Minimum Wage as those other, uncontrollable variables change.
Still, the argument for SOME Minimum Wage is compelling — particularly the argument that labor cannot be stored for later use as capital can, and the deflationary spiral with falling demand and falling prices. (Of course, if one accepts that, one must also accept the reverse — an inflationary spiral if the Minimum Wage is tied to inflation.)
However, the argument to raise it to match some arbitrary “social cost of labor” is not compelling in the least. The “social cost of labor” is no different, and may even be lower, than the “social cost of the unemployed”. A person must still have food, water, clothing, and shelter whether he is employed or not. But a person who is employed has some hope of improving his employment situation — getting a raise or a better job based on his experience. Someone who has never had a job is no more employable at 25 or 30 than he was at 18, and is perhaps even less so; while a person who has been employed since 18 is more employable at 25 and 30.
So one goal should be to get as many people as possible on the economic ladder as soon as they are in the market for work.
If we set the Minimum Wage to the point that a full-time worker (40-hrs. per week) can support a family of four, we would be putting that bottom rung out of reach for many people. Black employment peaked (at 16,307,000) right as the Minimum Wage was raised in July, 2007. It started falling the very next month. Coincidence? I don’t think so.
So we choose to subsidize the worker (and his family) instead. I reject the notion that we are subsidizing the employer, because we would be subsidizing the worker whether were employed or not. So the subsidies are not tied to the employer in any way. There is no reason that a 17-year-old living and home and working part-time needs to make an hourly wage that would support a family of four, and having different minimums for teenagers would result in teens being favored over those who need to support their families.
So you have convinced me that some minimum wage is necessary. However, you have not convinced me that it needs to be raised. Both papers cite lax enforcement of immigration laws as undermining wages, though neither cite “free trade” as doing the same. Raising the Minimum Wage would only make that situation worse — encouraging more people to come here illegally for work and further undermining the employment prospects of citizens and legal residents, and encouraging the further transfer of jobs offshore. We need to get a handle on those problems or a rise in the Minimum Wage will do more harm than good.
I believe that the Minimum Wage should be left as it is at the national level, and the States and localities can raise that as they see fit. What might be a reasonable minimum in DC or NYC is nonsensical in Appalachia.
“Warren, stop making that mistake. Why did wages spike in the 3rd quarter? EPOP is badly flawed.”
Sorry, Bert, but which mistake? I’m sure I have made several, and it’s hard to keep track.
I do not see the spike you are talking about in the data. According to the BLS, seasonally-adjusted average hourly wages have been rising at about $0.05 per month for a while now:
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2006 20.05 20.16 20.13 20.23 20.30 20.32 20.41 20.44 20.48 20.57
2007 20.60 20.68 20.77 20.82 20.88 21.00 21.00 21.03 21.08 21.11 21.15 21.22
2008 21.24 21.32 21.41 21.42 21.51 21.56 21.63 21.73 21.76 21.81 21.92 21.98
2009 22.00 22.01 22.08 22.11 22.12 22.16 22.19 22.25 22.27 22.32 22.37 22.38
2010 22.43 22.45 22.47 22.51 22.55 22.54 22.60 22.64 22.68 22.74 22.74 22.77
2011 22.86 22.87 22.89 22.94 23.00 23.02 23.11 23.07 23.12 23.22 23.20 23.22
2012 23.26 23.30 23.37 23.40 23.42 23.47 23.52 23.49 23.58 23.57 23.64 23.73
2013 23.76 23.79 23.82 23.87 23.89 23.97 23.97 24.02 24.06 24.10 24.17 24.18
2014 24.22 24.30 24.34 24.34 24.40 24.46 24.47 24.55 24.55 24.59 24.68 24.62
2015 24.76 24.78 24.85 24.89 24.95 24.95 25.01 25.10 25.11(P) 25.20(P)
P : preliminary
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I hope the labor participation rate does not go any lower.
I am afraid that if it does, the cable and satellite companies will be sending me junk mail daily instead of weekly.
Warren, you said nothing. EPOP is flawed because it does not adjust to population GROWTH. Notice, a population can grow slower, but grow, but that lowers the number.
Your in denial. My guess by next spring, your kind of posting will be dead.
Bert, I can honestly say I have no idea what you are talking about.
What is EPOP?
About what am I in denial?
Thanks, Run. Aside from my weight and male pattern baldness, any idea what I might be in denial about?
Look there is some serious confusion in the room over the need to raise the minimum wage and how to achieve that end. First we do now just automatically say oh lets raise it for this or that group. I heard all the republican candidates state they would not approve raising it which is fundamentally wrong because we need the market place to raise the min. wage not to be done by executive order. Yes old man Ford rolled the dice years ago and won but that is not the way to do it. Now if the borders were sealed and cheap labor became in greater demand and less supply of course the lower wage worker wage rates will go up. It only follows the principles of supply and demand . Then perhaps some unemployed American worker will cut my grass, serve my table, wash my dishes, pour my cement for hirer wages than before but was created by market place demand and supply, not interference…
Well, Ford may have rolled the dice and won but he also may have done something sensible that resulted in a win for him and his employees. I have still yet to see anyone here explain how our super productive economy is going to continue when the vast multitude of our population cannot afford to buy its products or services. Who, exactly, is going to be the market for all of that productivity?
Thanks again, Run. I wasn’t talking about either one. I just posted the average hourly wages looking for the spike Bert was talking about.
Hope your back feels better soon.
Run, agreed but the quandary remains that econ 101 used to, and probably still does, require demand to expand or maintain production. If only the wealthy can buy and they remain a very small proportion of the population, whence comes the demand? What am I missing?
Glad to hear the procedure went well and you’re doing better.
I am not comfortable with the “output gap” being attributed to capacity that will never be used. I understand how we could be at PEAK GDP, and still have zero inflation, but I would argue that, thanks to bad incomes policy, peak GDP is less than potential GDP. It is one thing to say that the output gap cannot be filled and quite another to say that it has been filled. Indeed, I see power in the argument that income inequality PREVENTS the output gap from being filled, so I wouldn’t want to “dumb down” potential GDP and lose a target at which policy might aim.
“Potential GDP” is, for me, a parameter of Okun’s Law. To apply that rule – I’m not saying it’s correct, just how it works – we need to estimate the output gap to estimate what a change in unemployment will do to prices. THAT output gap has to be the driven by actual unused capacity, whether or not the economy will tank before it is reached, because even capacity that will never be used suppresses prices. So for Okun fan’s, Mr. Lambert’s “potential GDP seems to me a different beast from Mr. Okun’s “potential GDP,” and their output gaps measure different things.
The argument for an incomes policy based on the difference between peak GDP and potential GDP resonates with me. But I wouldn’t state the problem in terms of zero inflation at zero output gap. I would say that the natural interest rate remains negative, because the maldistribution of income makes inflation impossible above the ZLB.. As for the NAIRU, there is a level of unemployment at which labor’s share increases and, with it, the price level. That will always be true, but the level itself may be falling over time as labor becomes less valuable in real terms.
If we put the NAIRU in motion downward, maintaining even level inflation becomes problematic. I suspect the first derivative of NAIRU has been too small to worry about, until now. But, starting in 1970 or so, a case can be made that, in the US, anyway, NAIRU has been falling at an accelerating rate as labor’s share has fallen, and the rate of decline in NAIRU has now become enough of a head wind to inflation as to deserve attention. That attention starts, I think, by recognizing that peak GDP and potential GDP are different things.
“That seems implausible to me, but then, so too does a nearly zero gap, given the lagging inflation rate.” – Menzie Chinn
The gap can be closed with weak inflation pressures.
Just hold down labor power, spread underemployment among more people, reduce labor share by 5%, mute investment and increase inequality. You weaken consumer power for more people.
Now the real problem in understanding low inflation at a zero gap is thinking there is still much more spare capacity with so much underemployment. That is not good thinking. Underemployment does not necessarily imply spare capacity. It could also imply economically marginalized people working in underemployed jobs, which holds down wage inflation.
The economy has a balance for the number of labor hours needed for the concentrations of consumer wealth in an economy. The higher concentrations of wealth that we see now imply fewer labor hours in balance. We have seen labor hours peak at the same level for two decades now. The result is that many people will be cut out (marginalized) from the economy because they are not needed in the balance.
So what appears as spare capacity is really unneeded capacity that will never be utilized.
How many people have been cut out of the economy by rising inequality? We will eventually know as the Fed rate seeks normalization.