An alternative perspective
13 November 2015
The Return of the Luddites: When Technology and Toil Diverge
"The production of too many useful things results in too many useless people.”
“In the short term, most things that contribute to productivity growth are very painful.”
The recent job numbers for September and October from the Bureau of Labor Statistics in the US make for confusing and uneasy reading.
Non-farm payroll employment increased by 142,000 in September – over 60,000 less than the Bloomberg consensus and 38,000 less than even the lowest estimate. In October, they rebounded to 271,000, compared with a consensus of 190,000. The unemployment rate ticked downwards slightly to 5 per cent, but average hourly earnings and the number of weekly hours worked stagnated. Meanwhile, the labour participation rate – the percentage of the population either working or actively looking for a job – shrank to its lowest level for almost 40 years (see Figure 1).
The fall in unemployment in recent years suddenly seems less a case of more jobs and more a case of increasing numbers giving up hope of employment. Meanwhile, real median weekly earnings are back to where they were in the late 1970s.
As recoveries go, we have had better.
It is not an isolated case. Across the pond, UK real wages have fallen steadily since the financial crisis and are now at levels last seen at the turn of the century. Alongside this, productivity has stagnated and is only just starting to surpass pre-crisis peaks. In Europe, 15 per cent of the unemployed have been unable to find a job for over four years and despite the bright prospects of continued quantitative easing, the overall unemployment rate will stay in double digits through to the end of the decade.
The Fall of Labour
The above facts are deeply troubling.
This is one of the weakest recoveries on record by almost any metric. The data also points to a growing disconnect between buoyant asset markets and a more fragile real economy.
In the absence of wage inflation, organic growth and its associated consumption is limited. It is hardly surprising that central banks continue to play a dovish tune, postponing tightening as push comes to shove.
Meanwhile, politicians look to score points over issues of social injustice. In the US, Hillary Clinton’s main rival for the Democratic nomination – Bernie Sanders – wants to remodel the US on the Scandinavian welfare model. The UK is amidst a bitter political row over cuts in tax credits. Raising the minimum wage is the new political mantra.
Across the globe, parties that promise a fairer deal for the common man –whether the compassionate conservatism of the Tories or the naked redistributive populism of Syriza – are on the rise.
The political wind is not blowing the vane left or right. Instead, it is transforming into a tornado of protectionism (by any other name).
Technology Will Save Us All
But there is hope. In a world of uncertain growth, technology has emerged as a messiah.
Policymakers and investors are falling over themselves today to support new technology as the economy’s future growth engine. Disruption is the norm. The last few years have seen the rapid rise of Airbnb, Uber and the collaborative economy; the long march of the unicorns (tech companies with a valuation of $1 billion or more); the spread of the pervasive ‘cloud’, now fuelling Amazon and Microsoft’s recent share price surge; and all prompting a flurry of venture investing that has eclipsed the excesses of the dot com boom.
Technology is a boon to companies. It automates mundane tasks, creating efficiencies and enhancing the returns on capital.
But technology is also creative destruction in action. It reduces the need for labour, putting downward pressure on wages. Its disruptive nature can render existing sectors obsolete, resulting in a loss of jobs.
The very nature of employment has shifted in recent decades, thanks to the rise of technology. And the trend has accelerated as we approach the cusp of what some term the ‘Third Industrial Revolution’. Next year, for example, Japan will test driverless taxis, while major car manufacturers are already trialling automated trucks. Robots can pick fields of cauliflowers and 3D printing promises to drive manufacturing costs down by another level of magnitude post China. As these innovations take off, they will inevitably bring with them enormous job losses.
It’s a familiar pattern. In the late 19th century, mechanisation led to the advent of mass production factories and key labour-saving devices such as cars. At the same time, they also destroyed entire livelihoods such as the domestic service sector and horse carriages. More recently, we have seen how the advent of the Internet has impacted the business models of major high street retailers and wiped out the video rental market (remember Blockbuster Video?).
None of this change is bad in the long run. Progress brings benefits.
The added efficiencies lead to enhanced spending power, improved GDP growth and an improved quality of life. Both mechanisation and the information revolution led to enormous gains in affordability and productivity for everyone. They also brought enormous social benefits – the washing machine was perhaps the seminal invention of the 20th century as it liberated women from the strictures of Victorian wifehood and allowed them to enter the job market, unleashing a wave of feminism. More broadly, few would choose to return to a world before cars or the Internet.
However, change also takes time. Labour does not move instantaneously to the new opportunities created by these technological shifts. The benefits of lower pricing take time to emerge and in the interim, jobs are lost and wages stagnate as people seek to maintain employment.
In this context, the discordant labour data of recent years is also symptomatic of a deeper structural issue. Since the early 1980s, the wage share – the proportion of GDP accounted for by labour – has declined dramatically while the return to capital has proportionally increased. A recent long-term study by the Economic Policy Institute in the US showed that from 1979 to the end of 2012, the median US worker saw just 5 per cent growth in real wages, while productivity soared by 75 per cent. Only steep rises in compensation for top managerial positions and the financial sector prevented an even greater disconnect.
Today, there is a growing conflict brewing in society. Policymakers cannot simultaneously protect labour markets from market forces whilst also encouraging innovation. For the latter to thrive and bring growth, creative destruction has to take place.
We face a clash between technology and toil, whose impact is bruising in the shorter term and whose resolution is critical to the future of economic growth. This is a paradigm shift where the nature of employment undergoes a sea change, as returns to labour (real wages) fall while returns to capital (profits) rise. This is also a dangerous scissors pattern that can shred social cohesion and fan the flames of populism.
Today, the labour data indicates we are in the midst of this transition. That social tensions did not emerge earlier is thanks to a soothing combination of falling prices (thanks to China and technology) and easy access to debt.
Future trends will exacerbate this. Post crisis, companies are increasingly turning to technology to maintain and enhance earnings. The latest advances in robotics, logistics and so on make it easier than ever to replace workers and further automate previously human tasks. Alongside this, the capacity to add more debt to the system is limited, given the vast quantum that already exists.
As jobs become harder to get and lower paying, populism risks unleashing a technological backlash. We are already seeing shades of this future conflict, for example, in the recent moves by cities to regulate or even ban Uber in the face of protests. Rises in the minimum wage and the growth of the welfare state are likely, as policymakers respond to electoral pressures. Corporate profits get squeezed in turn, creating a vicious circle as they seek to rescue profits through increased productivity.
The First Industrial Revolution had the so-called Ned Ludd and his followers, who resisted in vain the march of the loom and eventually had to be violently suppressed. The Second Industrial Revolution of the late 19th century had the Long Depression of 1873-1879 as society adjusted painfully to the new world. GDP per capita shrank in nominal terms because of the huge deflationary impact of technology on the cost of living. While purchasing power grew in real terms, the impact on public confidence was hugely negative. Immigration became a divisive issue, high returns to capital led to the Gilded Age satirised by Mark Twain, and popular dissatisfaction gave birth to new ideologies like Marxism and fascism.
The Luddites are once again in the ascendant. Technology versus toil is set to be a dominant theme in both markets and policy for the coming decade. Which direction we pick will have an enormous impact on the future of growth.
Bob Swarup is the Founder of Camdor Global, an advisory firm focused on macro trends, investment strategy, risk management and regulation. He is a Fellow at the Institute of Economic Affairs and author of the critically cclaimed book ‘Money Mania’, which examines 25 centuries of financial crises