Automation and its effect on jobs is a hot topic today. In order to understand the impact of automation on jobs, a simple model was created. The conclusions drawn from the manipulation of the model is as follows.
Automation produces greater amounts of goods and services at lower prices. The bright side is that automation does grow the economy. The dark side is that it creates greater income inequality. The rich get richer and the poor get poorer.
A number of methods used to somewhat balance out income inequality was reviewed. None, to the extent employed today, have stopped the march of income equality although they might if more strongly employed.
A new method of dealing with income inequality is proposed. It balances out automation’s highly efficient narrow range of activities with man’s inefficient wide range of human activities. The proposed plan rewards human interaction and other value added activities that can only be effectively performed by humans, even though these activities are not as efficient as automation.
Blog Post “CitizensPolicies.org – A Fair Tax for All – Considerations for Labor Affected by Globalization and Automation
A hot topic today is automation. The effect of automation on jobs is reported in the media quite frequently. This effect is even more pronounced when labor is a fairly large portion of the total cost of a company’s operations. When companies see the opportunity to lower cost and increase profits from automation, they do it.
A Look at the History on How Automation has Affected Labor
The following chart displays the percent of wages and salaries to Gross Domestic Product (GDP) from 1960 to August 6, 2015. GDP is the total monetary value of all goods and services produced in the United States each year.
One can see that as other factors of production increase, wages and salaries from labor decline. In this case, wages and salaries accounted for about 50% of GDP for the years 1960 through 1975 as compared to about 43% today. Wages and salaries from labor will continue to decline as a percent of total GDP as automation continues to increase.
Constructing a Simple Model of an Economy
When companies automate and lay off workers as a result, what effect does that have on labor and the economy? A simple model representing an economy was made in order to see the effect. The model consisted of five companies all making widgets. The companies had employees with a labor cost of 40% of total costs. They all had equal production quantities and selling prices to consumers. The employees were also the consumers, as it is in any real economy
With this basic simple model economy constructed, it was assumed that one company automated some of their operations and laid off half of their workers. The effect of automaton was then analyzed.
Two important assumptions were made about human behavior that would be expected in any economy and which seem to hold throughout history. They are:
- People Consume to the Extent of Income – For the most part, most people consume close to the total income that they have to spend. Sure, there are a few big savers and the few rich that save more than the poor and middle income classes. However, when a whole economy is considered, spending rates are always high in relation to income.
- Unemployed Workers will Go Back to Work Eventually Even at Lower Wage Rates – For the most part, people will eventually go back to work even if it is at lower wage. The reason is simple, they have to eat and find shelter. Pressure builds to go back to work to meet basic needs. When layoffs first happen there is unemployment for a period of time but after lots of hardships and juggling, most find their way back to being employed.
Analyzing Results Using the Model Economy
A comparison is made between the model economy before automaton when labor represented 40% of total costs for five company’s vs when one of those companies automated and laid off half of their workers. The following are conclusions that can be drawn after manipulating the model economy in a number of different ways.
- Employees at First Lose their Jobs at the Company being Automated
- The Price of Goods go Down due to Lower Cost of Automation
- Productivity Increases from Automation will be offset by Laid Off Workers taking Jobs in Low Productivity Activities at Lower Pay
- Due to human requirement to eat and have shelter, the laid off workers will eventually find employment but at low productivity jobs at lower wages. Many times these jobs are low paying service jobs.
- Total Production Remains the Same
- Higher productivity at the automated company is offset by low productivity and low paying jobs so total economy output was the same
- The Average Wage Declines
- The Effect of Automation is Neutral to the Economy in Total
- The average wage decline is offset by increases in productivity and therefore even though there is less money to buy goods with, prices are lower to make the economy neutral. In aggregate this is the case but the effect on income distribution is significant.
- The Effect of Income Distribution Within the Economy is Significant
- When companies automate they create high paying skilled jobs. Laid off workers go back to work at low paying unskilled jobs. The effect is that although the whole economy is neutral the income distribution is not. What is created is fewer high paying jobs and more low paying jobs making for a widening gap in income distribution.
- Adjustments to the Model Grows the Economy & Widen Income Inequality
In order to keep the model very simple, the effect of investment and production of the automated equipment was not considered, only its effect once it was installed. However, the effect of creating automated equipment would be to grow the economy due to investment and production required to manufacture/create it. These activities would tend to grow the economy rather than keep it neutral.
In addition, creating automated equipment requires higher skills with corresponding higher pay. This only goes to create greater income inequality.
KEY CONCLUSIONS – The effect of automation, without the effect of creating the automation equipment, was neutral as to economy as a whole but created a widening gap in income inequality.
After taking into consideration the investment and manufacture of the automated equipment, the total economy grows with automation and it also widens the income inequality gap even more.
The Problem is Not Automation but Income Inequality
In many ways automation has been good for all of us. It has enabled us to buy more goods and services at cheaper prices. It has created more high paying jobs and it has grown the economy.
However, there is a dark side to automation. It has also caused workers to seek lower paying jobs which have low productivity attached to them. Although these workers also enjoy lower prices they have less money to spend. The employees with higher paying jobs and the owners of capital who are rewarded by automation also enjoy lower prices, and they have more money to spend.
So the problem is not automation: it creates greater goods and services at lower prices. The problem is the income inequality that automation creates.
Solutions to Income Inequality Proposed in the Past
If income inequality problem can be solved, then the world is better off with more goods and services to be enjoyed by all as a result of automation. The answer is not to stop automation, but to solve the problems of income inequality that it creates.
The flowing are potential solutions used and/or proposed in the past for solving the income inequality problem.
- Raise the Minimum Wage – The higher the minimum wage the better the equalization of incomes. However, there is a downside in that raising the minimum wage provides more incentive to automate these lower paying jobs, thereby creating more income inequality.
- Lower the 40 Hour Work Week for Same Pay – The effect is the requirement to hire more workers to make up for hours lost, which in turn will increase overall wage rates because of the law of supply and demand. A benefit is more leisure time for all. However, again there is a downside in that it provides more incentive to automate these lower paying jobs thereby creating more income inequality.
- Create Public Works Programs – This concept was used during the great depression. The US government creates jobs by building various public works that would be better for the nation. Again by the law of supply and demand, overall wages rise bringing about a lessening in the income inequality gap.
- Low Taxes to No Taxes for Lower Income Workers – The effect of low taxes to no taxes for low income people while the higher income people shoulder the load brings about more equal distribution of income. This is the progressive income tax.
- Inheritance Taxes – Inheritance taxes levels the playing field.
- Subsidies in Goods & Services (Socialism) – Programs that subsidizes the poor like food stamps, Meals on Wheels, Medicaid, etc. help level out income inequality. Taken to a great degree this concept is called Socialism.
- Basic Universal Income – This is a popular notion which gives each citizen the basic right to an income whether they work or not.
Proposed New Solutions to Income Inequality
What is automation strengths? Automation is extremely good at being efficient and delivering a very narrow range of activities that produce goods and services at very low costs.
What is man’s strengths? Man’s strengths are the polar opposites of automation. Man is very inefficient but can deliver a wide range of activities that produce at a very high cost. In addition, man can have emotional feelings and interactions.
In an Adam Smith free market society, automation is so powerful that its strengths begin to overpower man’s strength. Even though society is better off from large and cheap quantities of goods and services, the wealth accumulates in such a way as to have a large inequality of income.
So how do we begin to level the playing field? The answer may be to set up mechanisms to reward people for their human strengths.
Jobs that require human interaction for success may be rewarded with subsidized incomes by partial cash payments. Smart machines cannot compete with human interaction services. Some of these jobs are those performed by ministers, phycologists, social workers, teachers, researchers, elderly care providers, child care, etc. The US government could pay partial payments for human services jobs.
The same concept can be applied to activities that add value to lives, such as those in the arts, but don not necessarily involve human interaction. These activities include art, music, and writing, The US government could subsidize incomes of persons working in those areas.
These subsidies to those performing human interaction services and value to human experiences would be paid by the US government. The US government would be taxing more the efficient more automated activities to finance the subsidies paid for more human inefficient activities. See the post “A Fair Tax for All – Considerations for Labor Affected by Globalization and Automation”. This paper deals effectivity with a fair way to tax.
Key Points of the Proposed New Income Inequality Solution Plan
- Automation’s strengths are a narrow range of activities which are highly efficient.
- Man’s strengths are a wide range of activities which are highly inefficient.
- Present capitalistic system rewards more to automation and less to man’s inefficient activities thereby causing income inequality.
- Proposed new system sets up rewards to those who perform human interaction and added human value activities paid by US government so as to lessen income inequality.
- Man’s activities are rewarded through subsidies from the US government, which gets money by taxing all people in a fair way. See post “A Fair Tax for All – Considerations for Labor Affected by Globalization and Automation”.