The question I consider is whether automation, technical progress, outsourcing, and the increasing complexity of products and services—all closely related phenomena—are reducing demand for workers, especially but not only those who do not have a high IQ.
There is a long history of exaggerated concern, rightly derided by economists, with the replacement and hence displacement of workers by machines. The idea at its simplest is that labor-saving devices whether in home or factory production, or in services, displace labor, leaving workers unemployed. The logic is simple. Over the course of my lifetime I have seen an enormous improvement in the quality of razor blades. A razor blade used to be good for one only shave; now it lasts weeks, even months. So fewer razor blades are made and therefore fewer workers are required in order to make them. The result is a worker surplus—but the logic that predicts this result is flawed. Workers made superfluous by technical advances constitute a pool of labor available to producers of new products and providers of new services. The existence of the pool places a lid on the price of labor, and therefore on the prices of the new products and services (since labor is an input into those products and services). Low prices stimulate buyer demand, which results in greater production, increasing the demand for labor. For centuries incomes have been rising in tandem with technological progress.
There has long been concern that automation of manufacturing was eliminating high-paying factory jobs, propelling the factory workers no longer needed into lower-paying service jobs. But this concern, too, is exaggerated. It overlooks the fact that higher pay for factory work is compensation for the fact that such work tends to be strenuous, monotonous, dirty or unhealthful, and dangerous. Compensation for disamenities is not a component of real income but an offset to a cost. It is the obverse of long vacations, which are an amenity of teaching and therefore a component of teachers’ real income.
But there is nothing inevitable about the virtuous process whereby automation and related negative effects on particular jobs merely shift workers to other jobs that are equally or more desirable. Workers may be highly compensated for possessing human capital that is specialized to a labor market that is shrinking. We are seeing this in law today. Because of automation, outsourcing, and more efficient management practices, the demand for lawyers is down, forcing many lawyers either to drop to lower rungs in the profession’s ladder or to leave the profession entirely for work in types of job which their human capital specialized to the practice of law has less, or maybe no, value to employers.
There is nothing new about this phenomenon, and in the long run labor markets adjust—fewer persons are applying to law school today and so eventually the lawyer glut will end. But at the same time there is no guaranty that labor markets as a whole will adjust smoothly to changes in demand in particular labor markets. That depends on the size and rapidity of those changes, and in turn on the size and rapidity of changes in automation, outsourcing, and management practices, all linked to technology in a narrow or broad sense: automation obviously, but outsourcing (for example of legal research to lawyers in Indiana) because of improvements in communications technology (especially online) and management practices because of advances in psychology, management science, human resources, computers, and communications.
If technological advance is very rapid, causing in turn a large and very rapid drop in demand in a large labor market, the economy may not be able to absorb the sudden surplus of labor in a short period of time. The result will be soaring unemployment that will retard normal market processes by reducing incomes and in turn production and therefore in the demand for workers. Take the case of the driverless car. This technology is advancing very rapidly and has great promise for reducing labor costs (drivers), traffic accidents (for example by eliminating drunk driving), traffic violations, and traffic jams (by optimizing speed, lane usage, and choice of routes and times). There are approximately 4 million truck, taxi, limousine, and bus drivers in the United States, not to mention gas station attendants and traffic policemen. Not all these jobs will be eliminated overnight, but they could go quite fast.
Apart from specific job categories, technological advances in products and services, along with greater outsourcing opportunities and free trade with other technologically advanced nations, increase returns to IQ and educational achievement relative to other worker qualifications such as strength, quick reflexes, and physical fortitude. The design, production, and control of robots require intellectual qualities that are not required in factory workers. Though there is evidence that IQs have increased over the last century and may continue doing so, and though some day it will be possible to increase IQ by altering brains, technological advances may continue for some time to increase the wage premiums for high-IQ workers and reduce wages of average- or low-IQ workers, thus increasing the rate at which inequality of incomes is growing. Not that the jobs of high-IQ workers are immune from the effects of technological progress; I gave the example of lawyers. Any job category involving a high degree of specialization is vulnerable. Think of the impact of photography on portrait painters, or of computers on typesetters.
These trends bear on the current debates over the size of government. Technological advances are increasing longevity, and with it an increase in the dependent population. By reducing demand for workers, and therefore employment and wages, in many labor markets, the same technological advances may be creating a second dependent population, consisting of people of working age and their children who cannot support themselves without public assistance that will either replace or augment wages. Republicans may therefore be tilting against windmills in thinking that the size of government can be reduced.