The Labor-Light Economy

Forgetting about the impact of climate change and global conflicts, just looking at the labor market alone, there is a huge maze of trends leveling the cost of labor to a worldwide standard based primarily on naked productivity, shifting wealth to those who own the increasingly-sophisticated, often automated, tools/machines of productivity and reducing the relative value of those who simply operate the equipment. It is an ugly side of economic polarization, but a reality that will only accelerate in the years to come.

We’ve been here before, but we have never seen such a massive polarizing phenomenon before. “In 1821, a few years after the Luddite protests, the British economist David Ricardo fretted about the ‘substitution of machinery for human labour.’ And in 1930, during the height of the worldwide depression, John Maynard Keynes famously warned about ‘technological unemployment’ caused by ‘our discovery of means of economising the use of labour.’ (Keynes, however, quickly added that ‘this is only a temporary phase of maladjustment.’)

“Now, technology is once again under suspicion as rising income inequality confronts the United States, Europe, and much of the rest of the developed world. A recent report from the Organization for Economic Cooperation and Development concluded that the gap between the rich and poor is at a historically high level in many of its 34 member countries, driven largely by a drop in earning power for the bottom 40 percent of the population. Many of the lowest earners have seen wages decrease over the last few decades, and the OECD warns that income inequality is now undermining economic growth. Meanwhile, the erosion of the American middle class and the pressure on the lowest-paid U.S. workers has been painfully evident for years.

“Only 68 percent of men between 30 and 45 who have a high school diploma were working full time in 2013, according to a recent report by the Hamilton Project at the Brookings Institution, a Washington-based public-policy group. Earnings for the typical worker haven’t kept up with the growth of the economy for decades. Median earnings for a man without a high school diploma fell 20 percent from 1990 to 2013, while wages for those with only a high school diploma dropped 13 percent. Women have fared somewhat better, though they still generally earn less than men. Over the same period, earnings for women without a high school diploma dropped 12 percent, while earnings for those with a high school diploma actually rose by 3 percent.” From Who Will Own the Robots? Technology Review, (July/August 2015).

But as unions have lost their hold on the private sector and with a little push from the “gig economy,” one where labor is ad hoc and, at least so far, void of fringe benefits and long-term commitments to workers, the labor-cost-component of anything but the most skilled workers in the land has been stagnant for many and falling in true buying power for most Americans. The costs for U.S. workers are beginning to level out as foreign workers in developing nations are beginning to see rather steady increases in their paychecks. The bad news: Americans aren’t earning so much on average. The good news: expect a lot more manufacturing to return to our shores as the competitive cost of foreign labor combined with the cost and inconvenience of distance makes it economically viable to keep that work here in the U.S. MIT researchers Andrew McAfee and Erik Brynjolfsson call it the “labor-light economy.”

The disruption to our social structures has consumed the deep thoughts of many experts. Here’s one view from two scholars drilling down on the problem, Michael Fertik, founder and executive chairman of Reputation.com, and Vivek Wadhwa, a fellow at Rock Center for Corporate Governance at Stanford University, director of research at Center for Entrepreneurship and Research Commercialization at Duke, and distinguished fellow at Singularity University (Washington Post, September 21^st):

“But there will also be greater division through the rise of a powerful class. Those with specialized skills and abilities, who cannot be conveniently replaced by machines, will enjoy better employment and the resulting capital spoils. Think of this much smaller subset of people as the new 1 percent. Those who can’t compete in this rising paradigm will struggle, because technologies haven’t yet made food, shelter and healthcare free or nearly free, although that day is clearly coming.

“At the same time we enter this trough, politicians will attempt to derail the inexorable onset of the jobless future. Those on the left will want to slow-roll its arrival, to preserve what they see as a heyday of economic opportunity: the chance to broadly compete for jobs across a variety of sectors and companies.

“Those on the right will see this as the natural outgrowth of capitalism but constituent pressure — especially in states where certain industries dominate but are likely to disappear — will win out. Both sides will struggle to adapt their thinking and reconcile themselves to a model that’s truly unlike anything we’ve seen before. And both will be keenly aware that the trough phase is the most dangerous for the nation — for as industries blink out like so many dying stars and the jobs with them, people will be unsettled, angry and even panicked.

“This phase will inspire us all to ask the question, how do we address a society that’s moving toward such dramatic unevenness?... Policy changes are essential. We will have to soften capitalism as we know it in order to save it.

“First, there will need to be a massively structural retraining effort to help prepare more people for the jobs that remain — and new industries that may surface which require skills and knowledge we can’t yet fully anticipate… Practically this might look like learning accounts — say, several thousand dollars for approved educational courses or training programs. Increasing competitiveness is ultimately the cost-effective option: you’ll move people off the rolls, enable them to get jobs that then enhance their ability to reinvest in the economy through spending, etc.

“Second, wage insurance – a supplement that lessens the gap between what a person was earning and currently earns – will be fundamental during what will be a volatile period of adjustment as people, governments, and institutions come to grips with a sea change in the way we work. As this new paradigm gradually becomes the dominant model, not all workers will be shut out of opportunity. Some displaced workers will be able to find new employment, but at a lower wage in a new or existing industry. This will still present a hardship for most families, though obviously not as dramatic or wrenching as the total loss of employment. Wage insurance will help people preserve the lives they’d previously built and – as a huge benefit to society and governments writ large – be a stabilizing influence.”

The issues are buried in the mega-issue of our time: income inequality. Listen carefully to the candidates as they debate the issue. They are all promising a new, stronger, better-earning middle class. Dems and GOP alike. But how? Global trends are pushing in the other direction. There are an increasing number of Western thinkers who are beginning to question the continued value of “capitalism” in such times – including Pope Francis as he has so eloquently stated, particularly during his recent trip to the Western Hemisphere.

Listen to the denials from the self-same Republicans who once decried what they called “cafeteria Catholicism” (taking only what you like from that faith and leaving the rest behind) only a few years ago to embrace their newly refreshed views: the Pope’s comments on climate change and capitalism could not possibly be infallible because those are not religious doctrines, merely political opinions… despite the deeply religious research and Biblical references that support these Papal incantations. These issues are literally tearing our nation apart, and those with values mired in the past cling to the notion that somehow returning to that past will make it all right.  But change is here. It is not reversing itself, and we need new policies to deal with what we have never seen before. Now!

I’m Peter Dekom, and if we can just figure out how to pull together as the United States of America, and stop bickering among ourselves to implement unworkable policies, we might just figure it all out.