How automation and globalisation has killed the middle-class

By Leith van Onselen

From the IMF Direct blog comes an interesting analysis of the declining share of income going to workers, which is being driven by automation and globalisation:

After being largely stable in many countries for decades, the share of national income paid to workers has been falling since the 1980s. Chapter 3 of the April 2017 World Economic Outlook finds that this trend is driven by rapid progress in technology and global integration.

Labor’s share of income declines when wages grow more slowly than productivity, or the amount of output per hour of work. The result is that a growing fraction of productivity gains has been going to capital. And since capital tends to be concentrated in the upper ends of the income distribution, falling labor income shares are likely to raise income inequality…

In advanced economies, labor income shares began trending down in the 1980s. They reached their lowest level of the past half century just prior to the global financial crisis of 2008, and have not recovered materially since. Labor income shares now are almost 4 percentage points lower than they were in 1970…

Indeed, as growth remains subpar in many countries, an increasing recognition that the gains from growth have not been broadly shared has strengthened a backlash against economic integration and bolstered support in favor of inward-looking policies. This is especially the case in several advanced economies…

In advanced economies, about half of the decline in labor shares can be traced to the impact of technology. The decline was driven by a combination of rapid progress in information and telecommunication technology, and a high share of occupations that could be easily be automated.

Global integration—as captured by trends in final goods trade, participation in global value chains, and foreign direct investment—also played a role. Its contribution is estimated at about half that of technology. Because participation in global value chains typically implies offshoring of labor-intensive tasks, the effect of integration is to lower labor shares in tradable sectors… Taken together, technology and global integration explain close to 75 percent of the decline in labor shares in Germany and Italy, and close to 50 percent in the United States…

Another key finding of our research is that the decline in labor shares in advanced economies has been particularly sharp for middle-skilled labor. Routine-biased technology has taken over many of the tasks performed by these workers, contributing to job polarization toward high-skilled and low-skilled occupations.

This “hollowing-out” phenomenon has been reinforced by global integration, as firms in advanced economies increasingly have access to a global labor supply through cross-border value chains…

Sadly, Australian workers has fared badly against their Advanced Nation counterparts. As shown recently by Greg Jericho, Australia’s decline in wages’ share of GDP has been particularly steep:

ScreenHunter_16360 Nov. 29 13.36

In 1975, two thirds of Australia’s GDP was in the form of wages, whereas in 2014 it was just 53%.

The below charts, which come from the ABS National Accounts, illustrates the decline in Australian workers’ shares.

First, the growth in average employee earnings is the lowest on record:

And has failed dismally to keep pace with growing labour productivity:

Meanwhile, the share of total factor income going to workers (as opposed to business owners) has been falling for decades:

While the elites continue to sell us the economic virtues of globalisation and mass immigration, the gains are flowing primarily to the wealthy owners of land and capital, who get to privatisation the gains and socialise the losses.

Ordinary workers, by contrast, have been largely left behind, experiencing weak income growth, rising debt levels, deteriorating housing affordability, worsening congestion, and overall declining livability.

These factors, above all others, help to explain the rise of fringe political movements like Brexit, Donald Trump, and One Nation at home. It’s a class war.

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Unconventional Economist

Comments

  1. Stephen Morris

    This is only going to get worse.

    It is often said that those who fail to study their history are condemned to repeat it. More accurately, those who lack any sense of historical perspective are inclined to imagine they live at the END of history. There is a temptation to think that the conditions which prevailed in our own lifetimes represent the “perfection of history” and will remain thus ever more. Even notable historians have fallen for this delusion.

    But if we take a long view, there is nothing to suggest that the “Modern Era” – culminating in the Century of the Common Man and Woman – will last forever.

    Just as the Peasants’ Revolt arose from the labour shortages of the Black Death, so the Modern Era arose from the unique conditions of the Industrial Economy: the need to train large numbers of Subjects to operate the complex but not fully automated machinery of industrial production.

    Having had so much invested in their training, Subjects acquired value and their bargaining power relative to their Rulers improved. In the extreme, they could withdraw their labour and quickly impose greater costs on the owners of capital than they themselves suffered.

    Under such conditions, the optimal strategy for Rulers (and only after they had tried violent suppression and found it ineffective!) was to make certain limited concession to their Subjects.

    Living as we do at the end of this era, it is easy to forget that – when viewed with proper perspective – human history up until the time of the Modern Era was a story of aggressively narcissistic, machiavellian psychopaths competing (sometimes collaborating) to attain positions of power, then using that power to dominate and brutalise their fellow human beings. We know from the historical record that these rulers showed no remorse in wasting the lives of thousands – even millions – of people they regarded as “their” Subjects.

    That is the norm. That is the “base case” for human behaviour.

    As we move from the industrial to the post-industrial world of AI and robotics, there is no reason to assume that this world will not return. The “peasants” will be refeudalised.

    All one needs to remember is that human psychology has not evolved. The psychopaths have not gone away.

    The institutions of elective government are nowhere near robust enough to defend the common people from the renewed onslaught of these people.

    For those with a strong stomach, one possible scenario is presented here:

    https://www.macrobusiness.com.au/2017/01/biggest-risk-technological-change-inequality/#comment-2797887

    For most people, the likely outcome is grim indeed.

    • JunkyardMEMBER

      I like the way political economist Mark Blyth puts it.
      “Democracy is asset insurance for the rich and they’re skimping on the repayments”

    • As depressing as it is for me to admit as much, Stephen, I think you may be entirely correct. A few months back my cousin was extolling the virtues of reading Satre and what it taught him about the human condition. I complete disagreed and told him that if he really wanted to understand the human condition he should go watch a clan of Chimpanzees try to eat, f**k, and dominate one another. Humanity as a whole is far better represented by a group of monkeys than the abstract musings of some effete philosophers. I am constantly amazed at how much our nobler pursuits of equality and compassion are constantly being run over by the selfish greed and narcissism of power-hungry sociopaths. I wish it weren’t so, but, as you said, history has consistently proven otherwise.

  2. Chris Martenson of Peak Prosperity blames this on the removal of the tie of the USD to gold in 1971, which allowed unfettered money printing, rapid credit expansion and financialisation of everything, including housing. The elite have first access to credit and get bailed out if their speculation fails on a massive scale. The poor have access to credit at the tail end of the credit boom, and are left holding the bag when it crashes. Financialisation is at least as bad as globalization and automation in creating inequality. When the banking sector starts to dominate instead of serve speculative frenzies engulf the culture and you see everyone chase the specufestor dream. I knew someone who did a PhD with Steven Hawking as a supervisor. He became a banker. Wasteful.

  3. Just look at what Uber is doing to destroy jobs for existing taxi drivers. Soon they will have driverless cars.

    Then look at what Air BnB is doing to the rental market while enriching capital / land owners.

    Both foreign companies with fingers in local economic pies. We need protectionism to prevent this sort of extortion going on.

    Whilst it makes our lives more convenient it comes with a larger cost. I’m convinced that the company I work for is contributing to the demise of the middle class.

    I myself would have been made redundant if it was that easy to automote my skill set but technical support is very difficult to automate. Low end repetitive work yes, but specialised troubleshooting not so easy. Too many variables.

    What we are seeing however is the tip of the iceberg. It’s only going to get worse unless laws prevent an onslaught by global firms operating without borders.

    • Ronin8317MEMBER

      Driverless car doesn’t work right now unless there are no human drivers : that is the next frontier, when human are banned from driving so the driverless car won’t crash.

      • Robots affected both men’s and women’s jobs, the researchers found, but the effect on male employment was up to twice as big.

        Nah can’t be true, the patriarchy is to blame for all of societies ills. Women are being paid less than men.. That’s our biggest concern.

        The data doesn’t explain why, but Acemoglu had a guess: Women are more willing than men to take a pay cut to work in a lower-status field.

        So that pay gap of 70 cents on the dollar is because women might be willing to take lower paying jobs? Hmmm… sounds sexist to me. 😀

      • Stephen Morris

        The data doesn’t explain why, but Acemoglu had a guess: Women are more willing than men to take a pay cut to work in a lower-status field.

        This is the critical issue.

        AI denialists often don’t recognise the fact that they are relying on a sample size of 1 – “1 Industrial Revolution” – to draw all their inferences.

        And it is a sample which is largely irrelevant to the robotics/AI revolution. The Industrial Revolution saw human physical power and human physical dexterity replaced by machines, while human beings continued to have cognitive superiority.

        Indeed, human’s cognitive superiority become relatively more valuable during the Industrial Revolution because a properly trained human being was able to control a much greater value of production. It was this unique aspect of the Industrial Revolution which gave us the Modern Era: the need to train large numbers of Subjects to operate the complex – but not fully automated – machinery of industrial production. Once trained, Subjects had greater “value”. In the extreme, they could withdraw their labour and rapidly impose upon the owners of capital greater costs than they themselves incurred.

        This situation was exemplified by the Flight Engineer. A Flight Engineer was a man (usually a licenced aircraft mechanic) who sat behind the pilots in old aircraft like the Boeing 727. His job was to stare at a panel of dials and if one of them should go into the red zone, report that fact to the pilot who would then deploy the appropriate response. The pilot himself could not perform this job because his own cognitive ability was fully engaged in the other tasks of flying the aircraft. Only in an emergency – identified by the Flight Engineer – would he redeploy his valuable cognitive abilities to deal with the situation.

        The Flight Engineer was employed in cognitive control. It wasn’t the most intellectually demanding of jobs but it did require a degree of training and understand of how aircraft engines and systems worked.

        But if Flight Engineers were to go on strike, they would bring to a halt billions of dollars (at today’s prices) of aircraft. Accordingly, it was easier to pay them a premium wage to watch dials.

        And this was replicated through the industrial economy. After trying to enforce obedience from their Subjects through ruthless oppression – and finding it ineffective – Rulers grudgingly made concession to their industrial population. The result was the Modern Era with the Modern Era values we have come to regard as “normal”: things like egalitarianism, democratisation and national self-determination.

        But contrary to what certain deluded historians might have believed, that wasn’t “The End of History”. There was never any reason to assume that the Modern Era conditions would continue. And they haven’t continued.

        What we are witnessing now is a “Cognitive Revolution” in which humans’ last remaining advantage is being replaced. The post-industrial world requires small numbers of extremely highly trained technicians. They can easily be bought off, or – better still – reduced to the status of indentured workers through the weapon of crippling student debt.

        That doesn’t mean that there won’t be other jobs. But they will be the low status jobs referred to by Acemoglu.

        There is actually no limit to the number of low status jobs that psychopathic Rulers could create. The “doormen” of former times were a classic example. Doormen performed no useful task that couldn’t just as easily be done by a physically capable human being. Their real purpose was to allow their employer/owner to telegraph his status to the world:

        “Look at ME!! Look at ME!! I am so rich and powerful, I can make this human being stand here dressed in a ridiculous monkey suit and I can make him jump to attention simply by clicking my fingers. Look at ME!! Look at ME!! I am MAGNIFICENT!!!!”

        There is no end to the number of such jobs. The Romans used to own ludi of gladiators whom they could order to fight to the death in order to telegraph their magnificence. In 65 BC, Julius Caesar gave funeral games for his father involving 640 gladiators and condemned criminals who were forced to fight with wild beasts.

        Living at the end of the Modern Era, a return to such conditions may seem inconceivable. But – taking a historical perspective – most things which have come to pass have at some point in time seemed inconceivable.

        The thing to remember is this:

        “Technology might be changing. But human psychology has not evolved. The psychopaths are still with us.”

        – – – –

        See also Brad Delong’s article on Peak Horse here: http://equitablegrowth.org/equitablog/technological-progress-anxiety-thinking-about-peak-horse-and-the-possibility-of-peak-human/

        Psychopathic Rulers have no more reason to allow obsolete human beings to breed uncontrolled than than they have to allow obsolete horses to breed uncontrolled.

        This is especially so if those human beings pose a threat to their own security. We may expect to see uprisings followed by brutal suppression and execution.

        Taking a historical perspective that is what Rulers do. See, for example: https://en.wikipedia.org/wiki/Harrying_of_the_North#The_Harrying

      • boomengineeringMEMBER

        Stephen so true but tried to explain the onslaught on robotics coming, to a RE agent the other day, he had no idea what lays ahead, most people don’t realize how soon this will happen.
        But in some instances it will reverse. I built/modified a machine for the University of Sydney to make the worlds first bionic eye years ago but haven’t heard anything since so I assume stem cell research has superseded it. We tend to believe inventions and such come sooner than they actually do, 1984, flying cars by year 2000 etc. Science fiction does usually come true but later rather than sooner.

  4. “While the elites continue to sell us the economic virtues of globalisation and mass immigration, the gains are flowing primarily to the wealthy owners of land and capital, who get to privatisation the gains and socialise the losses.”

    “Ordinary workers, by contrast, have been largely left behind, experiencing weak income growth, rising debt levels, deteriorating housing affordability, worsening congestion, and overall declining livability.”

    Cracking summary!

    “These factors, above all others, help to explain the rise of fringe political movements like Brexit, Donald Trump, and One Nation at home. It’s a class war.”

    It’s definitely class warfare, but those are all false solutions. They treat the symptom (maybe), instead of the cause. Need to look back to our forebears, especially movements that had lasting success in defeating the rentier class.

    • And the elites keep telling us to have open borders and invite more people in, just so they can keep juicing big business profits. While housing affordability deteriorates, wages get suppressed due to increased competition and along with it job security. All the while we spend more time commuting from further away and our quality of live goes backwards.

      Then we have to deal with backward ideologies, where innocent people are being mowed down by trucks / cars and mad folks due to these open border policies…

      I wonder why people are getting upset?

      • Elite theologians love to talk in honeyed terms about the “end of borders”, but they don’t really intend to abolish borders. All they are really doing is replacing “national borders” (over which the mass of ordinary citizens might have had some control) with “private borders”: elite private property.

        The Elite do not intend to rub shoulders with the plebs. They retreat to their private mansions, their private country estates, their private campuses, their private gated communities, all surrounded by private borders marked with “KEEP OUT. Trespassers Will Be Prosecuted!” signs.

        The Elite do not intend to stand, crushed cheek-to-sweaty-cheek with the prols on inadequate and overcrowded public transport. They whizz from their private mansions to their private offices on roads which have been tolled or “road-priced” or “congestion-charged” out of the reach of the masses. It’s rather like the Zil Lanes of old Soviet Moscow but justified nowadays by deference to that Great God, “Efficiency”.

        And from behind their private borders the Elite sermonise piously on the supposed intolerance of those outside! Hypocrites blind to their own hypocrisy.

        On all fronts the trend is the same: the alienation of public rights – over which the citizens used to have some say – to elite private interests.

  5. The argument that technology has caused a declining labour share of income is garbage. If it were true then why did wage share hold up so nicely for 30 years after WWII, during a period of rapid technological development, more significant, I would argue, than the relative technological advancement since 1980?

    Things changed when we transitioned from regulated capitalism to neoliberal capitalism in the late 1970’s, an ideology which firmly puts the wellbeing of capital ahead of the wellbeing of people, based on the flawed assumption that the latter always and only follows from the former.

    Read: https://www.amazon.com/Rise-Fall-Neoliberal-Capitalism/dp/0674725654

    • You sound like you might have been one of the few people who read the article on robots on this morning’s links:

      Robots and jobs: Evidence from the US – VOX
      http://voxeu.org/article/robots-and-jobs-evidence-us

      The authors summarise their work in the final sentence:

      “There is nothing here to support the view that new technologies will make most jobs disappear and humans largely redundant.”

    • “The argument that technology has caused a declining labour share of income is garbage. If it were true then why did wage share hold up so nicely for 30 years after WWII, during a period of rapid technological development, more significant, I would argue, than the relative technological advancement since 1980?”

      I think the mistake you are making here is treating “technology” as a generic effect. WWII was at the centre of an explosion of technology advance, however it was a pre-information technology. That technology was drastically changing the way society operated, and it needed armies of middle class people to effect it. Every new invention spawned ten other ones. It was an explosion. People had to do the leg work – there was no alternative.

      What we are seeing now is not the same. The technology of the 21st century uses networks, algorithms and self replicating machines to create another explosion, however this explosion is inside the world of the machines and humans are mostly just onlookers. That is a huge difference. You can prove that this is happening as well. Ask yourself how come we live in a world where there is so much abundant stuff, yet hardly anyone does anything productive? In any other age a useless do-nothing society preoccupied by navel gazing would collapse from starvation in a few decades – this is not happening now and the most likely explaination is that human labour is now mostly ornamental.

    • Exactly! Not a word about the trickle down economic theory and the busting of unions, popularised by St. Ronald Reagan, then adopted by conservatives worldwide.

  6. Greg Jericho works for the Guardian – which loves low-wage immigration!

    Typical lack of logic from left wing newspapers.

  7. It’s not showing up in the polls that much. The last shakes of a dying white west. Most people are still swanning around with their coffees, beards and yoga pants, acting like they’re above it because of their white privilege, netflix, SUV and their thongs with very clean feet. They are very outdoorsy, very white, they have great sex and and that gives them immunity.