Automation on the Economy

Bearing the fruit of automation has its costs and benefits

Historically, automation has created more jobs—directly and indirectly—than it has destroyed. By reducing the human labor needed to complete routine tasks, automation inherently increases labor productivity: as tasks cost less to perform, the price for goods and services decreases. With lower prices, consumers have more income to spend on other goods and services, providing more labor for other productive tasks. In this cycle of increasing productivity, automation creates new tasks and jobs in industries that did not previously exist. Economists David Autor and Anna Salomons found that the net effects of productivity growth, of which automation is a significant component, accounted for an 18 percent increase in employment from 1970 through 2007. The McKinsey Global Institute also concluded personal computers created nearly 16 million new jobs in the United States since 1970 despite displacing 4 million jobs

Although automation generates more jobs, growth, and higher living standards overall, it does have a disruptive impact on individuals and communities due to displacements, changes in skilled labor, and income inequality. 

The tasks most vulnerable to automation are routine cognitive and physical tasks; on the other hand, the least susceptible involve core skills that are difficult to automate such as critical thinking, social skills, management, decision making, planning, and innovation. In a recent paper, MIT researcher and economist Frank Levy explained a socioeconomic “hollowing-out” effect due to middle-skill jobs comprising a greater share of easily automated tasks.

 “Automation of the lowest wage jobs and highest wage jobs are hard because these jobs require unstructured physical activity and unstructured social interaction. Meanwhile, automation’s impact is relatively larger in mid-wage occupations because they involve relatively higher levels of structured physical and/or cognitive tasks.”

In the McKinsey study, analysts estimate that up to 32 percent of workers may need to transition to entirely different occupations by 2030 due to automation. However, the report notably refers to adoption rates of a few specific technologies—such as mobile phones—to extrapolate overall rates of technological innovation and productivity growth. Regardless, displaced workers who lose full-time jobs experience a 35 percent loss in earnings on average, mostly due to unemployment or fewer hours. In a 2011 study on recessions, Till Von Wachter, Jae Song, and Joyce Manchester found that the effects of displacement on workers be lasting, as earnings remained 15 to 20 percent lower 20 years later.

Moreover, the jobs created from automation are not distributed equally among those seeking employment. Between January 2010 and January 2019, the number of employed college graduates aged 25 and over increased in total by 13 million; meanwhile, only 55,000 workers without a college degree were employed during that time.

Historically, policy intervention has mitigated the disruption. The early 20th century fostered a public safety net to improve economic security for American workers and families. The New Deal launched by President Franklin Roosevelt established government services like Unemployment Insurance, Social Security, the Works Progress Administration, Aid to Families with Dependent Children. Contemporaries argued that in addition to aiding the United States’ recovery from the Great Depression, these programs provided key components of a strategy to transition and adjust workers displaced by technology. The Johnson Administration expanded the social safety net in the 1960s with the launch of Medicare, Medicaid, and the food stamp program. Later on, President Lyndon Johnson created the Blue-Ribbon National Commission on Technology, Automation, and Economic Progress, whose members recommended a negative income tax to provide financial support to out of work and low-paid workers to counteract the technological disruption. The US later implemented this idea into the creation of the Earned Income Tax Credit in 1975.

While government investments in education and expansions of the social safety net have been the US’s solution to the detriments of automation, it seems that policymakers may have to strengthen the bulwark against automation once more.

– Dylan Wang