The Negative Employment Effect Of New Technology In The U.S.

by: Jeremy Robson

Summary

QE Capital has disputed that new technology has a negative effect on employment.

Every comment on my previous article on the negative employment effect of new technology disagrees with the conclusion.

All articles that were quoted by QE Capital entirely miss the point that I am making.

I wrote an article recently regarding the low growth rates of inflation and growth in the U.S. economy. In that article I raised the negative effect of new technology on employment as one of the reasons for the low growth rates. QE Capital disagreed with the article and particularly with this cause and wrote a rebuttal. Also some of the comments in the section at the bottom gave me the feeling that the readers felt that I had lost my marbles completely. QE Holdings quoted the following articles as the reasons for their disagreement,

1. Technological change and the labour market

2. Relative wages in Latin American countries

3. Technology and the wage structure

4. The increasing demand for skilled workers in Australia

5. China's rising skill demands

6. Technical change and the relative demand for skilled labour in the U.S.

You would think with such a diverse set of reports on the positive effect on employment of new technology, I would hastily be revising my opinions and issuing retractions. Nothing could be further from the truth.

I have read each of the reports and would suggest that in general my conclusions are as follows;

1. The reports talk of positive demand for skilled employees due to the advent of technology (which supports the QE Holdings argument). Most of the reports then suggest that one of the problems is the shortage of people with the required skills. This brings me to my first problem. If the U.S. employment population does not possess the skills to do the skilled jobs created by new technology then the jobs will be exported abroad. Negative for U.S. employment. There is much evidence that jobs have been outsourced to other countries.

But this is not my biggest problem. None of the articles discusses the overall new jobs positions created by new technology. Let me explain. It is obvious that if a new technological advance is made, in any field, this will create new jobs to manufacture the new product. This is the demand that in general the 6 articles above are discussing. I have no problem with this argument but it does not go anywhere near far enough.

One of the most talked about new technologies is robotics. Robotics is now employed in many traditional industries and is being developed for many new uses. To manufacture a robot, new people will be required to operate the factories, repair the robots and improve the technology. The U.S. economy has added some jobs. However the robots will (in the future) be doing the shopping, the cleaning, the ironing, driving the car (possibly), doing the gardening and cooking the evening meal. This process will not just be happening at home but also throughout businesses in the U.S. So how many jobs have now been lost because of the new technology? - gardeners, cleaners, cooks, chauffeurs, taxi drivers, etc. Driverless cars are being tested now in America. Are more jobs being created in the manufacturing and service of the robots than are being destroyed by their invention? If there are, then there is a long-term negative effect on employment from the new technology of robots. As an example to demonstrate this there is now a restaurant in Japan that has robots serving its customers. Here are links to the Wikipedia robotic restaurant and coin operated restaurants pages. Coin operated restaurants are in operation around the world. The robots and coin operations will be reducing the need for waiters. All of the articles above look at the new technology in isolation and do not discuss any of the effects that it is causing. The new technology is reducing the demand for jobs as the new products replace existing jobs with machines. We have all heard of car manufacturers now needing very few people on the production line. Again, new jobs are created to make the latest industrial machines to produce cars and old production jobs are lost to the new production process. It is my contention that the number of jobs lost is greater than the new jobs created. There is some sense in this view (despite the comments of many SA readers to my last post). Any company that is at the cutting edge of development of new technology will have the latest production techniques and will therefore most likely be employing the minimum number of new employees that are needed to operate their production process. That is capitalism at work. The new technology employs less people than the old technology and the new technology is replacing the old technology. Result - a net loss of jobs. I have never seen an analysis of the jobs created and lost through new technology, but I bet that it would shock most people.

2. The internet is not discussed in any article quoted above. I don't know about you, but if I need something that has a value greater than £20 ($32) and I don't need it immediately, I go to the internet as it will be cheaper. So the internet is expanding as a means of trade throughout the world. The internet is new technology (relatively) and is replacing old technology (shops on the high street) and the argument above is valid. If the internet is cheaper then it is likely that one of the savings of business expenses (amongst many) is the cost of employees. That would mean that in general the internet is reducing the demand for jobs. I would be most surprised if this is not the case. Has the number of jobs that Amazon has created around the world surpassed the number of jobs lost in shops in shopping malls around the world? Here is a link to an article that suggests that half of U.S. shopping malls will be lost in the next 10 years. That would be a large loss of jobs! Do I have any research to prove any of this, I hear you ask? No, I am just using common sense. If the U.S. lost half its shopping malls in the next 10 years how many jobs would you estimate that to be. It's certainly not peanuts!

3. There is one last argument that is made in the articles above. New technology is creating innovative products at an astonishing rate which is causing new demand for previously unavailable products. This is creating new jobs and is growth positive. Mobile phones were only generally available in the 1990s and are now a major source of new employment. The list is endless, computers, laptops, sat navs, etc. This argument has merit. However how many people now have a record player, a video machine or a non flat screen TV? Strimmers have replaced shears, mobile phones have replaced home phones. As people, we only have certain needs and as we replace reading with TV and old style calculators with computers, all we are doing is changing the way we operate. Some new technology is obviously not just a better replacement for an older style, but much of it is. 20 years ago I could not sit and surf the internet, but a car is still a car even if it now has loads more gizmos. Technology will march on and make our world easier and better to live in. If I were to fast forward 100 years, I would guess that the amount of physical labour that will need to be done by us is minimal. Most of it will be done by machines. Will that process mean that in 100 years there will be more jobs available or not?

4. A Seeking Alpha reader sent me the following:

Excerpt from "Beckoning Frontiers" by Marriner Eccles, Fed Chairman 1934-1948:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth - not of existing wealth, but of wealth as it is currently produced - to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

If this is correct then new technology is bound by the ability to consume it. If there is no money to pay for the products that new technology is creating then eventually the rate of growth of new technology will slow. My question is 'is that a good thing for employment or a bad thing for employment?' If the FULL impact of new technology is reducing the need for new jobs then technological advances will be slowed. It is clear that we need a full and honest understanding of the problems that new technology is creating.

5. Basic economics states that GDP can be grown by one of two methods:

One, an increase in the population.

or

Two, an increase in the productivity of the population.

If new technology is increasing population productivity (which I am sure that it is) then the argument that it is reducing the demand for jobs must be incorrect. The economy is growing due to new technology and everyone benefits from the increase in demand that is created. Not so, I say. New technology is advancing productivity for those in employment at the new technology companies. If I am correct and the demand for jobs is being reduced by new technology then overall productivity is not being increased by new technology. The people employed in new technology are more productive, but there are less of them, so the productivity of everyone in the U.S. falls. This article 'The myth of U.S. productivity' sums up a lot of my views and I hope that you will find it interesting. The authors do not dispute the negative effects of new technology on employment but seek to mitigate the effect. They suggest that the U.S. should do a complete analysis of all its new industries to see which are the most successful. The government should then subsidise and promote these industries. Now that would be a step forward. I particularly like this paragraph from the middle of the article:

'We honestly don't have a clue about what's really going on in the U.S. economy. What's worse, we think we do."

I have thought for some time that the responses to the financial crisis were a disaster for the long term. The financial community has a great host of misconceptions that are leading us down the wrong path. Over the next 10 or so years we will learn new lessons that will hopefully put us back on the right path. One of those lessons needs to be that there is a negative employment effect to new technology. If we recognize the problem we can then work on the solution.

Conclusion

I am sure that many of you still think that I have lost my marbles, but at the very least I hope that you will understand that I am not making an argument without some form of reasonable thought process.

I hold to my conclusion that technology has a net negative effect on jobs in the U.S. for the reasons stated above. How much of a negative it is, I have no idea. As technology gets ever more sophisticated, the effect will grow not diminish. I recently saw pictures of the London Underground being dug with picks and shovels, horse and cart and hand operated conveyor belts. There were people everywhere you looked. That would not be the case now!

My last observation is that this problem is not one that needs solving now. It is (in my opinion) a very long-term problem that may well be having a negative effect now. There are presently much greater economic problems. It is something that we can most probably live with for some considerable time. It is like an itch that won't go away but that only causes minor irritation. As such we probably won't as a society do anything about it for many years. I am not arguing that new technology is bad. It is wonderful and enhances all our lives and must continue at an accelerated pace, if possible. However a reasoned discussion on its effects is needed to help resolve the problems that it causes.

As an investor I expect fairly wild swings in markets over the next 10 years as central banks try to offset problems (such as this one) that should be solved by government. If I am correct and monetary policy is not the answer to these problems, we are in the end phase of this bull market. Monetary policy however is much more powerful than I have expected it to be and I have been amazed at how long the economy has continued to grow without touching the causes of the financial crisis. If the U.S. were to enter recession today (and there are no indications in any data that it will) this would have been an expansion that is longer than the average over the last 100 years. It is also weaker than any over the last 100 years. That in my opinion is the problem that we are not facing. I could envision the S&P 500 hitting 2400 then 900 then back up to 2400 again, with really active monetary policy all along the way. This active monetary policy is relieving the politicians of any responsibility for having to make difficult legislative change. I have read many times that The Fed will not want to go back to QE, but I don't agree with this view. The Fed clearly considers QE effective in stimulating the economy and will use it again as soon as they feel it is necessary. I estimate that the economy will be supported by ever more active monetary policy whilst the underlying problems continue to grow but are masked by the Fed. If this is correct, I do not relish the investment challenges to come!

Disclaimer - This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.