The Software Society

How digital technology is changing our culture and economy

The Low Quality of New Jobs Threatens the Economy

In The Software Society and in this blog (Where are the jobs?), I’ve argued that celebrating each quarter that we’ve added a few jobs misses the issue, noting that the quality of jobs and median income have continued to decline. I argued that “productivity” has evolved into “over-automation,” a preference by companies to “hire” computers rather than people. Increasingly, the jobs being eliminated by technology impact the economically and socially critical middle class at a rate faster than the workforce can adapt. Economist Joseph Schumpeter’s “creative destruction” caused by technology advances now is doing more destruction than creation.

The Wall Street Journal on August 10 discussed some statistics that emphasize this trend in “Roots of the Living Wage Wave.” The article said, “Economic changes of the past decade have led to a decline across the country in well-paying jobs, such as those in manufacturing, and an increase in jobs that pay less, such as those in hotels and food services…Positions are increasingly being filled not with the young and inexperienced, but older and more skilled workers who can’t find other jobs.” The decline in average buying power implied by this trend must eventually lead to an overall decline in sales and profits for all companies. Lower wages today may temporarily boost profits, but the long-term macroeconomic effect will be a decline in GNP. A company can’t maintain revenues without buyers.

Unfortunately, the “living-wage” solution discussed in the article is a trend toward local governments requiring a higher minimum wage; the Washington DC city council, for example, has taken such a step. By raising the minimum wage, one could argue that low-paying jobs can simply be turned into higher-paying jobs. The result in DC is the usual unintended consequences when a government tries to set prices or wages. For example, Walgreens is threatening to open fewer stores (and thus create fewer jobs) in the city.

The better solution is to restore classical middle-class jobs so that there is less competition for the lower-paying jobs, and so that employers must pay more than the minimum wage to get good employees for those jobs, letting Adam Smith’s “invisible hand” create a balance. Government policies must encourage using technology to give employees better tools rather than using technology to replace the employees. Today’s government policies promote the opposite—preference for machines over people through costs and obligations for employees such as payroll taxes and health insurance while driving interest rates to lows that make capital investments in machines cheaper.

In The Software Society, I outlined several solutions that would help tip the scale toward the human solution, including an approach based on the corporate tax system. This isn’t the place to argue the details, but the core problem of over-automation must be addressed if there is to be a healthy long-term solution to today’s worldwide economic malaise.

2 thoughts on “The Low Quality of New Jobs Threatens the Economy

  • Jeremy Green says:

    Hi William, an interesting and thoughtful post, though I am not sure I agree with your conclusion. Over-automation is a rational response by companies to the cost of labour and their own relative bargaining power. The ‘bad’ jobs are the ones that can’t be outsourced or over-automated, but can still be provided by very low waged workers. Companies and the state act together to make sure that workers in these jobs have very little bargaining power. Anti-union legislation and immigration policies are part of this. It’s interesting that in Northern Europe where union density is much higher this particular aspect of the problem doesn’t manifest itself, at least not in the same way. I note in passing the different usages of the term ‘middle class’ in English and American usage. We tend to use the term to refer to white collar occupations with some degree of professionalisation, and to a lesser extent to independent small businesses. You guys use ‘middle class’ to mean ‘working class’, so people who work on a car production line would be middle class.

  • Your point is well-taken, in that it is rational in a microeconomic sense for all companies to seek to reduce headcount in the name of efficiency, just as it was rational for all mortgage companies to do what all their competitors were doing and take on bad loans. In the long run, both behaviors can have a disastrous macroeconomic effect. I’m not sure what a good definition of middle class is, but the median income in the US, which seems a good surrogate for middle income, has been declining precipitously even after the recovery supposedly started in 2009.

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