The Illusion Of Full Employment And Technology

Recently, Tim Duy wrote an interesting piece entitled "Yes, I am Optimistic" wherein he stated that:

"The lesson no one wants to draw from this recovery is that the US economy is both stronger and more resilient than commonly believed.

 

Do not dismiss the real improvement in the economy since 2009. It is not unimportant that 2014 is likely to be the biggest year for private sector employment…"

Tim is correct, the current run in monthly employment gains is currently one of the longest in history. It has also been suggested by the Federal Reserve that as the economy approaches "full employment" it will need to consider hiking overnight lending rates.

This is truly great news for an economy that is now more than six years into an economic recovery following the "Great Recession of the 21st Century."

However, what is either missed, or just ignored, is the rather large group of individuals that have disappeared from the fabric of the economy and, while still alive, are simply ignored by current statistical measures. Let's do some math using data provided by the Bureau of Labor Statistics.  [Note: I am only using the population between 16-54 years of age to eliminate the argument that "baby boomers are retiring" in droves, even though more individuals than ever, over the age of 65, remain employed.]

• Total Working Age Population (16-54 years of age): 248,657,000  
• Total Nonfarm Employees (16-54 years of age): 114,523,000
• Percentage Of Working Age Americans Employed (Full or Part-Time): 46.05%

Just for comparative purposes here is the same calculation at the turn of the century (January 1st, 2000):

• Total Working Age Population (16-54 years of age): 211,410,000 
• Total Nonfarm Employees (16-54 years of age): 118,602,000
• Percentage Of Working Age Americans Employed (Full or Part-Time): 56.10%

Here is what it looks like graphically:

Of course, here is the real problem. There are currently more than 93 million individuals that are simply no longer counted as part of the labor force.

You can see the clear surge in this group of individuals that began late in the Clinton years when the definition was changed to exclude all individuals unemployed longer than 52 weeks. This created an unintended consequence following the financial crisis as large chunks of the population have remained unemployed longer than 12-months as unemployment insurance was extended to 99 weeks.

However, while many economists still point to the financial crisis as the cause of the employment debate, the issue actually began at the turn of the century as technological innovation gained traction in the business environment.

Take a minute just to think about how technology has changed your current work environment. Many companies no longer employee receptionists as auto-attendents now direct phone calls. Today, an individual employee is able to produce the work of two or three individuals previously and because they are now "wired in" they are working even longer hours answering emails, researching and producing content when away from the office.

The NYT recently produced a video showing how technology has changed the farming landscape from one where "farm hands" were hired to plant and harvest fields to automated machines doing the bulk of the work.

While artificial intelligence and robotics have certainly increased productivity of the average worker, it has also reduced the need for employment in many areas.

Tim Knight recently pointed out an interesting fact in this regard.

"Take for example Briggs and Stratton headquartered in Milwaukee, WI. In 1980, they employed 20,000 workers in their factories making small engines. Today that number is down to 5000. And the reality is that they moved no jobs out of Milwaukee and are manufacturing more product than they did in 1980. And many of the 5000 now employed are skilled technicians that service the mechanized assembly operations.

 

The same is true in the automotive industry and pretty much every other manufacturing segment of the economy. And it is not just the factory floor. Computers have slimmed the size of office staffs, phone answering systems have replaced call receptionists and so on. Computers have not only trimmed workforces but eliminated entire manufacturing companies as their products became obsolete."

Of course, it is often suggested that the creation of robots will create more high-tech jobs for skilled professionals. That is probably true in the shorter-term until inevitably robots begin to manufacture robots.

Importantly, you cannot blame corporations, farmers, etc. from continuing to move towards higher efficiencies to lower costs and increase profit margins. The biggest expense for any business is labor, compliance with regulations surrounding labor (Sarbanes-Oxley,OSHA, EPA, etc.) and the costs of benefits (Healthcare, 401k plans, etc.). The more businesses can reduce physical labor, and legal and regulatory compliance costs, the greater the profit margin on each dollar earned becomes.

My good friend Charles Hugh-Smith of OfTwoMinds pointed to this exact problem in his post "Labor, Capital and Ideas in the Power Law Economy:"

"Rather than rehash the usual failed Keynesian Cargo Cult economics, the authors describe three powerful ideas that resonate very strongly with my own work:

 

1. Digital technologies (networked software, automation and robotics) are radically reducing the need for human labor and the leverage of traditional capital (land, fixed assets and cash) globally.

 

2. Premiums flow to whatever inputs are scarce. Labor and traditional capital are no longer scarce; what's scarce is innovative, practical ideas. Ideas (for new models, products, services, processes, etc.) are a third form of capital that will accrue most of the rewards.

 

3. This distribution of premiums/rewards follows a power law, i.e. the Pareto Distribution where the "vital few" with the 3rd type of capital (good ideas) reap most of the rewards.

 

This is, of course, a generalized simplification, and there are plenty of parts of the economy that still depend on labor and conventional capital. But the point here is that thanks to globalization and overcapacity, most inputs are no longer scarce, and so the premium (high wages and/or profit margins) that the owners of labor and capital can charge is trending down in every tradable sector."

The illusion of full employment that has glazed over the ocular cortexes of most economists who continue to hope that wages will be forced to rise supporting a continued economic recovery. However, as witnessed by the latest report on unit labor costs, after six years of economic recovery real hourly compensation remains in a decline. [Note: the spikes in compensation at the beginning of each year is due to annual year-end bonuses and dividend payouts by the bulk of partnerships that now dominate the corporate entity structures. These payouts and distributions are passed through as income directly to the underlying members/partners.]

The increasing use of technology to replace human capital is a trend that will not reverse anytime soon and will continue to proliferate areas where unskilled, repetitive labor can be automated. This is the risk that fast food workers take by lobbying for higher wages; an ordering kiosk can be quickly employed to take orders and deliver those to an automated production line. Or better yet, why not allow customers to simply place orders on the way to the restaurant through an "app." (There is a billion dollar idea for someone to develop.)

To quote Charles again:

"This means that the real winners of the future will not be the providers of cheap labor or the owners of ordinary capital, both of whom will be increasingly squeezed by automation. Fortune will instead favor a third group: those who can innovate and create new products, services, and business models."

The next time you go out take a moment to realize the impact of technology on everything you do. Also, notice how many individuals have the faces stuck into their phones being truly unproductive.

Imagine if Albert Einstein came back today and asked what the most incredible invention of this century was? The simple answer would be this small device we hold in our hands that contains all of the known information in the universe. Unfortuately, instead of elevating our society intellectually it has been reduced to sending pictures of cats and tweeting mean messages to people we don't even know.   

Economists are going to have to soon come to the realization that the structure of the modern economy has permanently changed. Continued increases in technology will continue to suppress the need for labor and the competition for available jobs will depress wages. Going forward economists, politicians and Central Bankers are going to have to rethink the role of work, our place in it, and the long term effects on the economy.