According to standard economic theory, labor is a good like any other, traded on the labor market. Like with all other markets, the price for labor, which is the wage, ensures that supply meets demand. When there is a shortage of labor, the price of labor goes up, and more people offer their labor on the market. When there is an abundance of labor, a decrease in the price of labor prevents unemployment.
Economics recognizes that there is not just one market for labor, and whenever necessary, one considers special labor markets which are usually defined by the special kind of labor traded. In this sense, we speak of “labor market for medical doctors”, the “market for unskilled labor’, or the “market for university graduates”.
OBSOLETE AND NEW LABOR MARKETS
As it turned out, many labor markets disappeared in the course of history. There is no market for blacksmiths and wheelwrights anymore, but the frequent surnames “Smith” and “Wright” in England suggest that in the past, these were common professions. In Georgia one still has gatekeepers who open and close railway crossing gates, but it is likely that this job will disappear in the next years. In developed countries, the railway crossing gates are opened and closed automatically, without a human being actively involved.
On the other hand, also new labor markets emerge. For example, before the raise of computer technology, there was hardly a market for computer programmers.
Will there always be demand for labor?
Unemployment is a common phenomenon in most market economies. Economics has different explanations for unemployment, like market frictions and qualification mismatch. Yet the most common and most fundamental reason for unemployment is usually identified to be too high or too rigid labor costs, which in most cases are made up primarily by wages. Is this explanation convincing? Would the demand for blacksmiths and wheelwrights go up if their wages would go down? Nobody would make such a contention. But if the demand for entire professions can virtually disappear, how can we be sure that there is always enough demand for labor in general?
A HYPOTHESIS AS OLD AS CAPITALISM
Starting with the industrial revolution, people feared that the demand for labor might vanish. In the early 19th century, a violent political movement called “The Luddites” invaded factory halls in England and destroyed the machines. They felt that the ongoing automation of production processes would make it difficult for them to sell their labor at reasonable prices. Given the rudimentary technology available in the early 19th century and the enormous productivity gains which occurred ever since, from today’s point of view their concerns seem rather funny. The demand for labor did not fade in the last 200 years. Yet they were right that in principle, there is no mechanism in a market economy which ensures that there will always be (sufficient) demand for labor. In their book “Race against the Machine”, MIT economists Erik Brynjolfsson and Andrew McAfee look at this old question in light of the computer revolution. The argument that we will run out of labor demand is centuries old but always turned out to be wrong. Therefore nobody, including Bynjolfsson and McAfee, dares to predict the end of labor yet another time. Nonetheless, it is clear that many jobs which were recently considered to be solid sources of income might soon become obsolete. Last time that I was in Germany, my parents surprised me with their new vacuum cleaner robot – the robot vacuum cleans the whole house automatically, one just has to switch it on. Will there be demand for cleaning personnel in 10 years? I myself was a bit worried when I read about a software which constructs mathematical proofs automatically. Will there be demand for mathematical economists in 20 years?
WHAT IF LABOR BECOMES OBSOLETE?
If demand for human labor really declines for these fundamental reasons, we run into various problems. First of all, the biggest part of the economic output (about 60%) is distributed to the people as wages. How will we distribute the fruits of the production process when work input and performance cannot be the criterion anymore?
Secondly, for most people labor has more functions than just being the source of income. What will ordinary people do when they are not needed in the production process anymore? Not everyone is an artist or a Bohemian who has plenty of rewarding options how to spend time. For many people, their work structures their days, and their workplaces are often hotspots of social interaction. Unemployed people tend to degenerate and to lose social connectivity.
As I see it, economics does not have an answer how to tackle such a situation. Let’s just hope that we can go on for another 200 years without labor demand running short!
Comments
Florian, thanks for this niece piece. Human imagination is boundless and thats why I think that there will always be demand for labor - we have ever changing needs and only we can satisfy those needs through inventing machines. Until we are able to build machines and they are not able to build us we are superior - we are the creators. Creator is always something more than its creation and thats why we cannot create something that will be at least equivalent to us. So, there will always be a gap between humans and machines and this gap guarantees that human labor will always be valued.
Giorgi, Perhaps you are right, but I am not that optimistic. If you consider the least qualified strata of people, there is almost nothing they can do which cannot be done by the most sophisticated computers and robots available. I am quite sure that within the next 20 years or so, demand for unskilled labor will completely disappear, at least in developed countries where also unskilled people earn reasonable wages and it pays off to substitute them by ever-cheaper machines.
First, unskilled labour is not something "fixed" one wouldn't be able to deal with if forced to: that is, when demand for skilled labour comes to decline and ultimately disappear, "human imagination" will make certain to come up with ways to ensure there is no unskilled labour left (including through specialised education made available for those groups as well, free if need be). No demand -- no supply.
Second, the fact that many currently view their workplace as a space for/of social interaction does not mean they would not be able to satisfy a social component of their Selves in any other way if forced to. Daily patterns of social involvements of those in the feudal system of production/property relations in the past or indeed Bohemians/artists today could provide some insight into the direction in which our social life might evolve in future.
The key is to get the wage-based system of production/subsistence replaced by something else. That this something else -- yet another product of human imagination -- will ultimately introduce itself should raise no doubt. Let us just wait and see (or have our kids see) what exactly that something else is going to be.
Again such an optimistic comment :-). I hope you are right! But what do the facts say?
Already today, we have mass unemployment in many countries, much of which is made up of unskilled people. How has "human imagination" helped to give these people reasonable employment? As a matter of fact, many unemployed do not know how to use their time reasonably. They are prone to alcoholism, they suffer from not being demanded anymore, they lack challenges in their lives, and as a result they very often impoverish intellectually. In Georgia, you do not see that, because everybody is struggling for survival -- but when people get reasonable unemployment benefits, these phenomena are ubiquitous.
A fascinating blog post, and a very timely one if one considers the current trends in employment.
Teaching useless subjects to hordes of useless students would be another example of meaningful (???) but useless modern-day occupation.
If we look at the EU, not only unemployment figures are mounting to unprecedented (?) highs, but also labor force participation (the sum of those employed and actively seeking employment) is falling, among both men and women. In the US, female labor force participation peaked at 60% around 2000, and is declining ever since. For US males, labor force participation is on a steady decline from more than 85% to about 70% nowadays.
Another relevant fact to look at is the fast increasing income gap between workers of different qualifications. With more and more mechanical jobs being outsourced to machines or the (still cheap) East Asian workers, the income distribution in the West is now much more skewed towards the creative and irreplaceable high-skill workers.
Thus, the question posed by MI is a very important one: with the demand for unskilled labor shrinking, humans would have to come up with new ways to make sure that unskilled individuals are occupied in "meaningful" ways. A meaningful occupation does not have to be "productive" in the sense of producing economic value added. It has to provide meaning for the existence of individual society members (who would otherwise go nuts, commit collective suicide or revolt against the existing order).
Examples of such modern occupations are studies towards useless college and/or doctorate (and post-doctorate and post-post-doctorate degrees
Thus, as more and more economically productive jobs are performed by machines, low-skilled humans will be increasingly pushed (and pulled) into meaningful but economically useless activities. My blog post http://www.iset.ge/blog/?p=533 on the "over-education" trap is in fact nothing but a reflection on this trend.
Assuming this is indeed the trend, should it be resisted through labor market or education policies? I am not sure. What's wrong with having shorter work weeks/days, or not depending on work for subsistence? Why not study/teach/practice economically useless but psychologically satisfying skills, if machines do all the mechanical work and produce enough value for all humans to share in? Who would not want to trade a parking assistant job (a very common occupation for Georgian males) for that of a Bohemian artist, therapist or social science teacher!!!
You present interesting figures. These empirical data confirm that something fundamental might be going on.
Regarding the proposed solutions, I seem to be more pessimistic than you. Both your and MI's arguments about people becoming Bohemian on a large scale, or studying something meaningful but useless, are somewhat subjective. As people who are under pressure all the time and who find too little time to pursue their interest and hobbies, you can hardly imagine that one may have too much time. As a matter of fact, for many people it is quite difficult to cope with retirement, having depressions etc., even though they were suffering heavily from their stressful work before.
In addition, I think that both you and MI are intellectually very versatile, boasting with interests and curiosity. There are probably plenty of books you would like to read, plenty of intellectual areas you would like to get acquainted to, lots of pursuits you would find fascinating. The only reason why you cannot do all these things is a lack of time.
However, I am quite sure that the majority of people out there is different. They have very few intellectual ambitions in life. They are happy to follow their daily routine. When they have too much time, their lives degenerate.
Thank you, Florian, for the nice post. (I have read it earlier in a different context--the recent Khachapuri index--and was a bit confused. Reading it here made much more sense to me.) Thank you for the other commenters for insightful comments.
Although as a rule I always take the optimistic view, I totally agree with Florian's description of the (majority of) people, and their hard (next to impossible) time dealing with retirement. People who worked all their lives as farmers, truck drivers, in the transportation industry, and all manufacturing jobs--for all these people life STOPS when they retire. They have to deal with the idea of "living while dead." They breath, but they find no value in their life: thus a living dead. Some also try to meet that literal end of life earlier than scheduled! So, that is tough, that was tough thousands of years ago, and that will continue to be tough in the future. This, however, does not have to do with the idea of "demand for labor running short."
On the other hand, inasmuch as the 'future of labor' is concerned, I tend to agree more with the optimistic view: there will ALWAYS be something for these (young, unskilled) people to do in life. For one thing, "unskilled" is a relative term (currently, in the field of labor economics, we define 'unskilled' as somebody with 12 or less years of schooling: however, this is an ad hoc dichotomy that won't survive for long). Effectively, in some countries a BA degree is defined as "unskilled." Soon the 12 years threshhold of definition will go up to BA, then MA, then Doctor, that is you won't be considered 'skilled' unless you have a Dr. degree.
Secondly, holding education constant, in every profession there are people who are "skilled" in that profession, and there are those who are less skilled. That is, 'skill' is not merely measured by years of schooling--so we have to be precise when we refer to "unskilled" and the future of these. To complicate things further, the definition of skilled and unskilled jobs and/or workers is prone to changes (as it was always the case).
Thirdly, there is no machine which somewhere, at some stage, does not need a human being to operate it. Train and airplane help us move faster, but they need an operator and a pilot--and other maintenance people. This says, the actual number of needed laborers may go down with time (because a job done by two workers, say, can be done with one machine and one worker), but it will never go to zero or close to zero.
Fourth, in modern societies (about which this piece is concerned) there is I presume a decline in birth rate as much as there is a rise in technology. Ample body of research also shows that these (less) born kids end up more educated and skilled. Thinking linearly, one would arrive at the conclusion that there will be no "unskilled" labor in the coming future. So, as mentioned before, "no demand, no supply". I think the behavior of people (deciding to have less kids) is driven by the ambition to have "higher quality kids," and because that is costly it can be achieved only by having less kids. Bottom line, LESS people, who are mostly uniformly MORE educated, and there will be NO shortage of jobs.
Fifth, this brings me to think totally the other way around: indeed, there is a SHORTAGE in unskilled labor ('unskilled' in terms of education, that is), like construction workers (paving, building, painting, carpentry, etc...), which explains the imaginary prices these people charge in "developed" countries. It is easier to find a doctor to heal you in the US than to find a plumber to help you in your flooded apartment. And when you find one, you may end up needing a loan from the bank to help you pay him. What is happening here? SHORTAGE of such workers. Why? Because, as Eric alluded to earlier, it is in the "fashion" to get higher degrees and easier (white collar, etc..) jobs. The 'unskilled' (yet necessary) workers become scarce, and their price goes up. I know that the salary of a professor (i.e., very "skilled" given the years of education he/she gained) is much lower than that of a professional construction worker (examples are easily found in Israel and the US). The latter, however, has sometimes to deal with uncertainties--a point that Adam Smith mentioned 240 years ago. Nothing new.
Hi Muhammad,
Thank you for sharing your views with us. It is very plausible that there are problems to define the terms "skilled" and "unskilled" properly. Yet however you define them, I think it is not controversial that there are more and more jobs which can be substituted by machines and computers. (Arguably, these jobs happen to be more frequent in the category "unskilled", whatever definition is used.)
You say that there is no machine which does not need an operator. I disagree. Trains can be run without train driver, as it is the case for some lines of the Paris Metro and most airport trains. Planes, to take your other example, can be started and landed by computers. When a drone loses the contact with its operator, it lands automatically at an appropriate piece of land (this is why the Iranians acquired an intact Global Hawk drone some months ago). Take my word for it -- in 15-20 years, pilots and train drivers will have mere supervisory functions, if at all.
I absolutely agree that a decline in birth rates, combined with a restrictive immigration policy, would remedy the problem in the advanced countries (provided one accepts that there is a problem). It is questionable, though, whether it is possible (politically and practically) to restrict immigration to the advanced countries.
Your point five I find very interesting, but also a bit obscure, even amusing :-). If you are right and these are statistically robust observations and not just casual experiences, it would pose a problem for a couple of standard economic theories, wouldn't it?
I mean, every professor could become construction worker. If these jobs are so profitable, why are US professors still struggling with students and stuff? :-)
I have to correct myself: It wasn't a Global Hawk, but a Sentinel which was captured by the Iranians. And it wasn't some months ago, but more than a year ago.
Once again, thank you Florian for the continued discussion.
I'll just comment on the last point, I'll try without being cynical: professors do not become construction workers because they do not WANT to. The status, subjective utility, "rewarding work," and achieving dreams (for which they swam all the long way) being a professor, all these are higher than the wage gap to justify shifting.
Plus, there is something I mentioned there: professors' jobs enjoy certainty and stability that construction jobs lack. This is what we call "Compensating Wage Differentials": for a dirtier, more difficult job one gets higher wage. For a more convenient job (e.g., professor) one gets lower wage--but, in the same category of jobs, say in academia, the more educated gets higher wage, like a professor compared to a secretary in the same institution.
Also, to be a PROFESSIONAL in construction (builder, rather than porter, for example) you need to INVEST time and effort, learning and training--same as you go to university for long time to end up as a professor.
I.e., the simple 'wage gap' story is not enough to make professors construction workers. The very same simple story, notwithstanding, can explain that there IS a shortage in construction (generally unskilled) workers. It is easier for a young guy, fresh out of high school to become a construction worker (albeit not happening) than a professor to "downgrade" to a construction worker. Why the former, easier thing, does not happen? Once again, because it is the "trend," the "social status," and other things (like 'conspicuous education' as one of our students wrote in her thesis) that call for "educated people." The result: more "skilled" but less-needed (or lower wage) people.
Concerning Muhammad's point 5: a good handyman could indeed make more money than a philosophy professor. In the US as well as in Georgia. I don't think though that this contradicts any economic theory. While not necessarily having a lot of formal "schooling", naturally gifted and skilled handymen (e.g. carpenters) are a rare species. They have a lot of human capital, which cannot and should not be measured by formal schooling. It's just that there is no easy way to proxy handymen's skills. Good handymen may have a reason to be low on "schooling": they face a higher opportunity cost of studying. Hence, the possibility of a negative reverse causality between skills and formal education.
The opportunity cost of studying argument applies not only to handymen. My sense is that Georgia is characterized by negative selection into MA studies (which are a relative novelty in the former Soviet space. Until recent reforms there was no such thing. Everybody studied for a specialist diploma. Most MA programs are in fact total crap). The naturally gifted young Georgians can get good jobs in the course of their BA studies (or soon after) and often choose to not continue. Thus, the schooling coefficient in a standard Mincer equation for a sample restricted to Georgians with BA and higher degrees might very well be negative. A testable hypothesis
Thank you for very interesting and insightful post and discussion. I was hoping to see also something about possible future system but couldn't find it. I would like to state my view regarding the future of labor.
I think that, despite continuous change in the structure of labor employment, people will always require help from other people to do some things. And basically labor demand is the same - when you can not do something by yourself, you pay someone else, who can (or does it better). Machines can not replace humans just because they will always lack creative thinking and will not be able to respond to extreme situations (to my opinion).
Regarding the future, maybe it is time to think about the new system where all the mechanical work is done by machines and there is no formal labor supply and demand. Human labor will be still needed to supervise the machines, unless we will create a supercomputer which will be able to supervise all machine work. Then if that happens, there will be no required work to do by humans. Which means that we will be able to do work, which WE WILL decide that is important. It will be the system, where everyone is occupied by their desired job, without thinking how much will they earn before deciding which job to choose. Humanity will have more brains for allocating human resources towards science and development because all the black work will be done by machines.
I think money should become obsolete by that time and we should come up with better way of reallocation of wealth between population. Because money will no be able to fulfill its functions properly.
I hope it didn't sound too funny.
Hi Quji, It is an interesting utopia which you talk about, and it doesn't sound funny at all. Given the huge challenges our economic system faces in the future, it is very necessary to think outside the box!
Quji's utopia is actually quite similar to what Marx described as the "third stage of communism" in the German Ideology:
"In communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic."
Getting to this stage is conditioned on capital accumulation reaching a critical threshold beyond which material production ceases being an existential "challenge" for human society. Rather, the challenge becomes to find new meaning other than accumulation of capital and wealth...
Thanks Florian, yes it is Utopian but with some modifications it may be realizable. That's my hope.
Thanks Eric, I think Marx's "third stage communism" is very close to what I was trying to say and how I imagine the future.
If we put the challenges in the hierarchical pyramid, overcoming the challenge of material production, accumulating wealth will become irrelevant question and people will move to higher level of objectives which can be many different things. Except accumulating wealth, people also try to get recognition, become influential or play important role in history... Or, most importantly from my point of view, understand as much in this vast universe as possible during our lifetime.