Jobs are scarce and workers are feeling the pinch all around. Republicans would have you believe the government is to blame, limiting growth through bureaucracy. Democrats would have you believe that companies are simply greedy. But is the income of American workers really limited by a lack of growth or the avarice of a privileged few?
The short answer is just a bit more complicated. The distribution of the income has changed substantially since postwar America changed sometime around 1968. It’s not a failure of government or even the greediness of corporations, but a change in the most important market there is – the market for the talent and hard work of ordinary Americans.
Every once in a while another article references a study by Carl Fry of Oxford University showing that 47% of all jobs we know today could be replaced by machines in the coming decade. Fry is careful to note that this trend is nothing new, dating back to the dawn of the Industrial Age over 200 years ago. But his concern is that the trend appears to be accelerating, and may in fact become what defines “work” in the coming decades more than anything else.
This fits with the Barataria observation that a developed society only has so much paid work to go around. When the share of the population working goes above 60%, income inequality starts to grow rapidly. It suggests that there is a fixed labor market, and more workers simply suppress wages by the market forces of supply and demand. Given that we have had more than 60% of the population working since 1968, the year our inequality started to grow, it makes sense.
Automation is the reason there is less paid work to go around. Yesterday’s productivity gains are today’s unemployment. So if the money isn’t going to workers, where is it going? Consider this chart of the net share of total income (essentially the same as GDP, by a different calculation) taken home by workers since 1968:
Note that there was a 50/50 split of income between workers and companies in the sometimes longed for period before the market pressure of Baby Boom workers started to erode it. That split has gone down fairly consistently to where it is today, about 42.4% to workers and the rest to companies. Companies are making more and keeping it, eventually seeing it wind up as a return to investors. Working people only get it when they have enough to invest.
That 7.6% difference is not small in our roughly $17 trillion economy. It amounts to over $1.3 trillion, or about $11,300 for each of the 115 million households in the US. That’s pay lost every year because the distribution of income in the US changed, not because of any lost overall growth.
While it may be obvious to you what you’d do with an extra 11 grand every year, let’s stay with the big picture. Here is the median household income in the US, adjusted for inflation, since 1985:
It grew slowly before falling back down after 2000. The additional money that would be made with a more traditional relationship between workers and companies would be enough to erase the erosion in household income that we have seen since the start of this Managed Depression in 2000-2001.
What does that have to do with robots? They are the reason that there is only so much work to go around. If this trend continues, we may find that we are in an economy where there is even less work to be done by an ever shrinking workforce. The retirement of the Baby Boom and the collapse of the Labor Force Participation rate below 60%, as it was in 1968, will help – but the trend may well continue.
We can reasonably expect continued automation to define the new economy that is developing to replace the one that failed in this depression. That means that we have to come up with a new arrangement for this thing called “work” if we are unhappy with growing inequality and poverty. There are many possible solutions – including a much higher minimum wage, a reduction of the defined work-week to 32 hours or less, and perhaps even a system of taxation and redistribution along a socialist model.
All of these changes are first a new social agreement even more than they are a matter of law or policy. But they are coming. There is only so much paid work to go around, and in the future there may even be less. That trend has defined the last 46 years and may only accelerate. What will we do about it?