The Causes of Wealth Inequality (31): Automation and the Hollowing Out of the Labor Market

Conventional wisdom has it that automation comes at the expense of low-skilled jobs and aggravates income inequality because of labor displacement at the bottom of the income distribution. It turns out that this is a bit too conventional, and not only because it runs afoul of the lump of labor fallacy (machines need to be built and people can go on and do other things). Mid-level jobs are also hit by automation, and perhaps even more than jobs at the bottom of the skill continuum. This has been called the “hollowing out” of the labor market. This hollowing out, caused in part by automation, in turns causes an increase in income inequality. This is mere arithmetic: if the middle drops, then the extremes become relatively more important and inequality rises. Ryan Avent puts it well:

Work published in 2006 by David Autor, Lawrence Katz, and Melissa Kearney argued that employment and wage growth in America have “polarised” in recent decades, a conclusion that has been reinforced by subsequent research. Employment in high- and low-skill positions has risen substantially relative to middle-skill jobs. The resulting employment distribution generates a distribution of wages that is similarly polarised and more unequal than that which prevailed prior to this period. (source)

Why does technological automation focus mainly on middle skill levels?

Daron Acemoglu and Mr Autor pioneered a “task approach” to labour markets. Tasks can be completed by either labour or capital. The more routine a task is, the more susceptible it is to automation. But whether or not a task is automated depends upon the relative supply—and the real wage—of workers of various skill levels. Subsequent work has shown that automation and trade are responsible for displacement of routine tasks previously done by middle-skill workers, in both manufacturing and clerical or service activities, leading to polarisation of local and national labour markets.  (source)

Technological automation focuses mainly on middle skill levels because it’s relatively easy at that level, easier sometimes than at the extremes of high and low skilled tasks. “Easier” here means both technologically easier and more cost effective. Highly skilled tasks, such as teaching a philosophy course, are difficult for machines to do because they are complex (although we do sometimes see high-skilled jobs being automated, such as legal research for example). In the case of low-skilled tasks, some of these are surprisingly hard to automate, as in the case of truck driving or toilet cleaning. Even low-skilled jobs that aren’t technically hard to automate aren’t always automated because the pay-off may be too low – people doing those jobs are poorly paid so developing expensive machines to do it for them isn’t worth the trouble.

And then there’s the added worry that displacement of many low-skilled workers would create a permanent underclass unable to participate in the economy – unable, in other words, to buy the goods and services produced by machines. There’s a famous anecdote about Henry Ford mocking a labor union president in one of his factories, saying it wouldn’t be easy to get the robots to pay their union dues. To which the union president responded that Ford wasn’t going to get the robots to buy his cars.

The hollowing out of the labor market, driven by mid-level automation, has therefore a direct effect on income inequality, but it also a few indirect effects. For example, automation means lower production costs, and the savings or the added value go primarily to shareholders through capital gains and stock appreciation. Since stock ownership and capital income are concentrated among those already better off, income inequality is further increased.

If technology decreases the relative importance of human labor in a particular production process, the owners of capital equipment will be able to capture a bigger share of income from the goods and services produced. (source)

Another indirect effect: increasing automation of manufacturing jobs pushes unionization rates down, which in turn decreases bargaining power among low-skilled workers. This, in the end, aggravates inequality yet again.

More posts in this series are here.

Income Inequality (27): What’s Wrong With It? No Moral Justification

The standard “no problem” explanation of income inequality goes as follows: people have different incomes because they have different levels of human capital and productive abilities. Some earn more because they contribute more – to their employers but also to society. They simply deserve, in a moral sense of the word, their higher incomes because of the level and nature of their contributions. Increasing differences in income levels are then simply the reflection of an increasing gap in productivity and human capital between some groups in society.

However, there’s something wrong with this story: it hints at one important element but fails to draw the necessary conclusion from it. Some people contribute more in a quantitative sense of the word, in which case higher returns are probably morally justifiable. If you work more, few would begrudge you your higher income. However, that’s not the type of income inequality that is most common. Usually, people are believed to contribute more in a qualitative sense of the word and get paid more as a result (or vice versa, because they get paid more, they are assumed to have contributed more in a qualitative sense). No one claims that the salary of a CEO should be higher than that of a taxi driver doing two other jobs on the side because the former works more than the latter. He probably doesn’t. The justification people give for a higher salary for the CEO is almost always about quality. (See also here).

Now, how does a society decide which types of contributions are of a higher quality and are therefore more deserving of higher remuneration? In part, the “market” decides: skills and contributions that are highly valued by consumers will earn you a higher income. But biases, prejudices and market manipulation are also factors that determine which contributions are valued higher. For example, there’s a widespread bias in favor of people with a university degree even though their objective skills may not always be higher than those of less educated people; advertisement and popular culture instill the perception that beautiful people are more deserving; stars in sport and music are believed to deserve a very high income, higher than that of the “stars” in science for example. And then there’s the perfectly circular reasoning that some contributions are more deserving because they yield higher earnings.

Many of these social decisions about desert are arbitrary, biased, irrational and unjustifiable. And in no case is there an attempt to justify them on moral grounds. Hence, you cannot conclude that more productive contributions are a moral justification for higher income levels if you first fail to justify which types of productive contributions are morally superior and more deserving.

You could counter this by saying that all skills and contributions, no matter in what field, are in and of themselves sufficient to warrant higher pay. But then you admit that all skillful and productive people across different fields should earn similar incomes, and that is plainly not the case. 

So, even if income inequality could be justified on a moral basis – by first deciding in a rational and unbiased way which skills and contributions are morally superior and then paying more to those people who have been identified as having more of those skills and contributions – that is not how it’s done in practice. And I doubt that it can be done, because there will never be agreement on the choice of morally superior skills and contributions.

Of course, the absence and, presumably, impossibility of a desert based argument for income inequality doesn’t mean that there can’t be other, more successful justifications of income inequality. The most common one is based on incentives rather than desert. We want people to do good, worthwhile and valuable things, and generous rewards for the skillful and productive is one way of having these things. Again, there’s the problem of deciding in an unbiased and rational way which things are indeed valuable, but we may assume that the market offers a close approximation: what people want to buy and consume will often be valuable to them. Perhaps not always valuable in the sense of “valuable after rational reflection free of biases”, but that sense may be unrealistic anyway. So let’s accept – grudgingly in my case – that we don’t have to decide what exactly needs to be incentivized and what is worth incentivizing.

However, even if we assume that value and desert equal market success, there’s a problem with the incentive based argument for income inequality. It’s not right to force morality through the payment of incentives. Ideally there should be good will, and people have to do things of value for their own sake, not because they are incentivized to do it (as G.A. Cohen has argued numerous times).

The conclusion is that income inequality as it is now structured in all societies is not justified and probably not justifiable from a moral point of view. And that this is the only point of view from which it should and could be justified. Of course, the lack of a justification is only one thing that’s wrong with income inequality. More on what’s wrong with it is here, here, here and here.

Cooperation and Excellence in Capitalism and Communism

An important and valuable aspect of work which has been lost in many activities is cooperation. The modern industrial production process is characterized by unconscious cooperation. The division of labor – within a factory or within the wider economy – is cooperation, but the workers in a factory or the baker and the butcher buying each other’s products, are unaware of it. The conscious cooperation of individuals producing something together is more valuable, educating and rewarding for the individuals than individual production or unconscious cooperation which, unfortunately, is the predominant type in capitalist production.

Cooperation also typically transcends the generations. It is important to build on the achievements of the past. So even when you can work alone in a meaningful way, for example as a craftsperson (which perhaps has become rather unlikely these days), you are not really alone because the past masters of the art are looking over your shoulder and guiding you. And maybe you have a pupil.

And here’s where another important aspect of work has to be rediscovered in our era of deskilled and atomized production: the standards of excellence. Absorbing the history and tradition of a practice makes us better persons and enables us to produce, be creative, express ourselves and develop our personalities. Without abilities taught to us by tradition this is impossible.

Excellence, as conscious cooperation, is often lacking in contemporary capitalist production. The atomization of workers resulting from the division of labor promotes ever more detailed and limited knowledge, rather than insight in and mastery over processes. Workers are also deskilled because of automation. Skill and knowledge are incorporated into machines and computers, and a worker is still, in many cases, a mere machine-appendix with no need to know how the machine works.

Communism has rightly accused capitalism of neglecting the need for conscious cooperation and excellence, but it has failed, even theoretically, to offer an alternative. The alternative for unconscious cooperation is real corporate democracy, something that is only hinted at in communist theory and not likely to follow from the simple abolition of private property. Likewise, the communist solution to the problem of excellence – the end of division of labor – isn’t satisfactory. Excellence or skill require education institutions and encouraging and supporting communities, which are often lacking or underperforming in industrial societies. The days of the atomized workers in anonymous industrial cities and extremely compartmented factories may be gone (in the West at least), but capitalism still isn’t known for its ability to foster supporting communities. And neither is communism. Only with supporting educational institutions and communities can individuals become someone, learn something and transform themselves through the activity of work.

It is obvious that corporate democracy is not enough to achieve this focus on excellence. And neither is the abolition of the division of labor. On the contrary. Excellence and skill require some modicum of division of labor. It is an illusion to believe in a future society where anyone can engage in or change into any activity he or she wishes, like Marx unfortunately did. This kind of variety and polyvalence is incompatible with excellence and skill. People are finite beings with limited time and abilities. One has to choose one’s “trade”, try to become skillful and hopefully lead a life of learning and growth, of productive and creative self-development and of self-expression within this “trade”. Some changes of heart are of course possible and desirable, but not limitless. But the word “trade” implies division of labor. Communism’s hope that automation would reduces the necessity for skills and trades is unrealistic and undesirable as well, given the benefits of excellence (i.e. education, community, belonging, support etc.). But this division between “trades” is rather different from the highly atomized world of divided labor in current industrial processes.

Excellence is not only incompatible with the complete abolition of division of labor. It also requires giving up the demand for total worker equality. The capitalist ideology of managerial expertise is groundless and oppressive. It reduces the workers to executors of the managers’ plans. It is obvious that the knowledge necessary to plan is not acquired through theoretical thinking but rather through working practice. So the division between workers and managers is artificial and will not hold.

But, on the other hand, complete worker equality will not hold either. Achieving standards of excellence leads, by definition, to differences between people, and it requires dependence (often temporary) on teachers, “masters” and tradition. One can see such a relationship as a form of domination to be combated, and it certainly is in many capitalist companies where it is often even undone of its original educational aspects. But it doesn’t have to be. It can be viewed as transformative for the “pupil”. Excellence leads to a good product and to a better producer as well, to someone who can become somebody and who expresses and develops his or her personality through production. This personal transformation through learning and production goes way beyond the transformation of skills. It touches the entire personality.

The Causes of Wealth Inequality (7): Education and Demographics

First education. Many people believe that increasing income inequality in countries such as the U.S. should be blamed on immigration: low-skilled workers have to compete against low-wage immigrants with similar skills. However, immigration’s effect on wages is one of the biggest political myths out there. If you want to understand the income stagnation at the bottom of the income distribution – mostly unskilled workers – you have to compare this group of people, not to immigrants, but to the high earners.

Starting about 1950, the relative returns for schooling rose, and they skyrocketed after 1980. The reason is supply and demand. For the first time in American history, the current generation is not significantly more educated than its parents. Those in need of skilled labor are bidding for a relatively stagnant supply and so must pay more. … In contrast, from 1915 to 1950, the relative return for education fell, mostly because more new college graduates competed for a relatively few top jobs, and that kept top wages from rising too high. Tyler Cowen (source)

Hence, income inequality rose not because of downward pressure on the lower wages (supposedly caused by immigration) but because of upward pressure on the higher wages (caused by increasing returns for schooling, which are in turn caused by stagnant supply of high education). That means we can do something about income inequality. We can improve education levels, diminishing inequality both at the bottom – by giving low-skilled people a better education and hence a better income – and at the top – by reducing the scarcity of supply of the higher educated and hence lowering the relative wages at the high end.

Now to demographics.

In general, there is more income inequality among older populations than among younger populations, if only because older people have had more time to experience rising or falling fortunes. … Since the United States is growing older … income inequality will naturally rise. Tyler Cowen (source)

Migration and Human Rights (27): The Economic Benefits of Immigration

The prevailing thought in most Western countries is that immigration is a bad thing, and it’s a thought shared by both governments and public opinion. Western countries, it is believed, can only accommodate a limited number of immigrants – a few hand-picked high-skilled ones, some low-skilled ones in very special circumstances for special industries and for a limited amount of time (when local labor can’t or won’t provide), and a few lucky ones who might otherwise face certain death or extreme pain in their country of origin (generously called “asylum seekers”). People merely fleeing the horrors of poverty (“economic migrants”) should think again.

When the numbers of immigrants surpass this threshold, it’s imminent disaster for these proud former rulers of the world with their efficient economies, exemplary political and legal systems and strong moral and religious traditions. Two disasters, to be precise: on the one hand, cultural and religious destruction and, on the other hand, economic destruction. Let’s focus on the latter shall we. (An age-old culture or religion that can’t withstand the onslaught of a few million poverty stricken and low-skilled nannies, builders and factory laborers doesn’t seem to deserve survival).

Immigrants are said to be a burden on social safety nets; and they bring down wages for local workers because they are willing to work for less (especially the illegal immigrants). Never mind that this is completely and utterly wrong.

However, not only are the disadvantages of immigration overstated, the advantages are understated. It turns out that relatively high levels of immigration are beneficial for the receiving economy, at least in the U.S.:

[C]omprehensive immigration reform* would raise wages, increase consumption, create jobs, and generate additional tax revenue. … This is a compelling economic reason to move away from the current “vicious cycle” where enforcement-only policies perpetuate unauthorized migration and exert downward pressure on already low wages, and toward a “virtuous cycle” of worker empowerment in which legal status and labor rights exert upward pressure on wages. …

[L]egalizing the roughly 12 million undocumented immigrants through comprehensive immigration reform as well as making future flows more flexible would grow the economy by $1.5 trillion over 10 years. … [I]n the short term (three years) [it would] generate $4.5 to $5.4 billion in additional tax revenue and consumer spending sufficient to support 750,000 to 900,000 jobs. … Conversely, the deportation prescription that is offered by immigration restrictionists would poison the already anemic U.S. economy by draining $2.5 trillion from the economy over 10 years, even before factoring in the costs to deport 12 million people and permanently seal the border. (source)

And this isn’t just left-wing extremism. Here’s another quote, from a right-wing think-tank:

This study finds that increased enforcement [of immigration law] and reduced low-skilled immigration have a significant negative impact on the income of U.S. households. … A policy that reduces the number of low-skilled immigrant workers by 28.6 percent compared to projected levels would reduce U.S. household welfare by about 0.5 percent, or $80 billion. … In contrast, legalization of low-skilled immigrant workers would yield significant income gains for American workers and households. Legalization would eliminate smugglers’ fees and other costs faced by illegal immigrants. It would also allow immigrants to have higher productivity and create more openings for Americans in higher skilled occupations. The positive impact for U.S. households of legalization under an optimal visa tax would be 1.27 percent of GDP or $180 billion. (source)

* legalization of illegal immigrants combined with visa reform

Much of the economically inspired opposition to immigration is about the wellbeing of local low-skilled workers. These people, the narrative goes, are unable to compete with low-skilled immigrants who ask lower wages, especially if they’re illegal (and don’t have to pay taxes, and their employers don’t have to pay taxes for hiring them). In the best case, this competition pushes down the wages of local people; in the worst case it pushes these people into unemployment.

The studies cited above show that such claims aren’t compatible with the facts: low-skilled local workers actually benefit from low-skilled immigration, especially if this is legal (or legalized) immigration, because it allows them to move to higher skilled positions. It also makes it possible for them to spend less time on low-skilled and non-paid activities that they can outsource, and hence they can spend more time on paid activities, which increases their income. And there’s another way in which the indigenous population – including the less wealthy parts – can benefit from immigration: legalization of immigrants pushes their wages up and increases tax revenues. Higher earning immigrants consume and invest more, which creates higher economic growth that benefits everyone. And the taxes that they pay can be used for social safety nets that also benefit everyone.

There’s actually some data showing that immigration doesn’t push down low-skilled wages.

This chart tracks the average median hourly wage for high school drop outs – the very subgroup that immigrations most pressures – in a variety of states. If, as some claim, high levels of immigration exert relentless downward pressure on unskilled native wages, you’d expect states with large immigrant populations to exhibit very low wages for unskilled workers. That doesn’t appear to be the case. … [E]ven George Borjas, the economist most often used by restrictionists, estimates that under realistic assumptions, the drag immigrants exert on native, unskilled wages is about 4 percent. Given the universe of things screwing over the working man, immigration just ain’t that large a player. (source)

And here are some other data confirming that the effect of immigration on the wages of low-skilled workers is negligible:

California may seem the best place to study the impact of illegal immigration on the prospects of American workers. Hordes of immigrants rushed into the state in the last 25 years, competing for jobs with the least educated among the native population. The wages of high school dropouts in California fell 17 percent from 1980 to 2004. But before concluding that immigrants are undercutting the wages of the least fortunate Americans, perhaps one should consider Ohio. Unlike California, Ohio remains mostly free of illegal immigrants. And what happened to the wages of Ohio’s high school dropouts from 1980 to 2004? They fell 31 percent. (source)

The Causes of Wealth Inequality (5): Globalization

Globalization is supposed to have lowered the earnings of less-educated workers by putting them in direct competition with low-wage workers around the world. This competition put pressure on wages through international trade in goods and services; through the relocation or threat of relocation of production facilities to overseas locations; through competition with immigrants in local labor markets; and through other channels. …

U.S. and European workers are told that … our societies can no longer afford a generous welfare state. …

Contrary to the standard framing, which presents globalization as something that no nation can escape or even attempt to shape, we can choose the terms under which we integrate capital, product, and labor markets across countries. Over the last 30 years we have indeed “chosen” a particular form of globalization in the United States – a form that benefits corporations and their owners at the expense of workers and their communities. If we had chosen globalization on different terms, however, economic integration would not have required rising inequality. Another globalization is possible. (source, source)

So globalization, as it has occurred and is occurring, causes higher inequality in the West in two ways:

  • The direct competition with overseas workers who can produce at lower wages puts downward pressure on wages in the West, especially for low-skilled workers at the wrong end of inequality.
  • Governments in developed countries react to this competition by restricting social safety nets because the taxes necessary for the funding of these safety nets hurts the competitiveness of local businesses, a competitiveness already under pressure from low-cost labor in the developing world. Less generous safety nets obviously also have a negative effect on inequality.

If these effects are real, perhaps they can explain the decline of manufacturing in many developed countries.

However, I’m not sure this pressure on wages is real and significant (I’ll try to find some data), and we also shouldn’t dismiss the benefits for low-wage workers in the West of cheaper products. This particular result of globalization can offset the possible negative wage effects of wage competition.

Also, I’m not sure governments in the West are actively attacking safety nets (here it says they haven’t during the last decades, but it seems that the recent economic crisis has convinced some to start cutting benefits). And finally, we should remember that inequality isn’t just a national problem. The inequality between countries is just as, if not more, important. And globalization has had a beneficial effect on inter-country inequality because it has redistributed wealth from rich countries to poor countries. For example, it’s hard to imagine how China could have had the same success in poverty reduction without globalization. The question is of course whether this redistribution had to come from low skilled workers in the West, rather than from their more wealthy fellow citizens. The fact that it did come, however, was undoubtedly beneficial to the poor in the receiving development countries.

The Causes of Wealth Inequality (4): Technology

[T]he diffusion of computers and related technology in the early 1980s steadily increased the demand for skilled workers relative to less-skilled workers, driving up the wages and incomes of more-educated workers and depressing the wages and incomes of less educated workers…

However, the technological explanation removed policy, politics, and power from the discussion of inequality, by attributing rising economic concentration to “technological progress,” a force that could be resisted only at our peril. (source, source)

Indeed, taken in isolation, this explanation obscures more than it reveals. To the extent that it reflects reality – and I think to some extent it does – we’ll still have to ask ourselves why there’s such a wide and growing distance between people with and without skills: why can’t we educate more people so that they can enjoy the wage premium of high-tech labor? Inequality isn’t just the outcome of technology but of choices regarding education, personal ones but also social and political ones.

And there’s another problem with the technological explanation of income inequality. It’s undoubtedly true that higher levels of technology increase demand for higher skilled people, and hence increases their wages (and vice versa for lower skilled people). When you combine this with the disappearance of a high number of jobs at the lower end of the wage sprectrum that are automated and replaced by computers, you end up with a strong push towards more inequality. However, this can’t explain the relatively large increase in income inequality in the U.S. and the U.K. when compared to other countries that are equally technologically advanced.

And neither can it explain why inequality is so top-heavy, in other words why the increase in income is concentrated in a tiny minority of individuals (the top 1% in the U.S.) whose skills aren’t that much different from those just below in the income distribution, if at all. Alex Tabarrok offers an interesting explanation of the fact that income inequality seems to be driven by very high earnings in the very top of the distribution. It also has something to do with technology, but not necessarily with skills:

J.K. Rowling is the first author in the history of the world to earn a billion dollars. … Why? Consider Homer, he told great stories but he could earn no more in a night than say 50 people might pay for an evening’s entertainment. Shakespeare did a little better. The Globe theater could hold 3000 and unlike Homer, Shakespeare didn’t have to be at the theater to earn. … By selling books Tolkien could sell to hundreds of thousands, even millions of buyers in a year … And books were cheaper to produce than actors which meant that Tolkien could earn a greater share of the revenues than did Shakespeare … Rowling has the leverage of the book but also the movie, the video game, and the toy. And globalization, both economic and cultural, means that Rowling’s words, images, and products are translated, transmitted and transported everywhere …

Rowling’s success brings with it inequality. Time is limited and people want to read the same books that their friends are reading so book publishing has a winner-take all component. Thus, greater leverage brings greater inequality. The average writer’s income hasn’t gone up much in the past thirty years but today, for the first time ever, a handful of writers can be multi-millionaires and even billionaires. The top pulls away from the median.

The same forces that have generated greater inequality in writing – the leveraging of intellect, the declining importance of physical labor in the production of value, cultural and economic globalization – are at work throughout the economy. Thus, if you really want to understand inequality today you must first understand Harry Potter.

More on inequality.