03/07/2011 02:05 pm ET | Updated May 25, 2011

Job Automation: Is a Future Unemployment Crisis Looming?

Two notable economists have recently weighed in on the issue that I've been writing about extensively: job automation and its impact on the future economy.

Paul Krugman links to a 1996 article in which he imagined a future where "information technology would end up reducing, not increasing, the demand for highly educated workers, because a lot of what highly educated workers do could actually be replaced by sophisticated information processing -- indeed, replaced more easily than a lot of manual labor."

That's very much inline with what I think is likely to happen. In fact The Atlantic recently published an excerpt in which I talk about how a Radioligist's job might be easier to automate than a housekeeper's.

I don't see a problem with the number of jobs: I don't see any reason that technological unemployment should be any more in our future than it has been in our past.

Really? Keep in mind that in the U.S. we need to create over a million jobs a year just to keep up with population growth. Within the next decade or so, I think it's likely that millions of jobs in both low skill areas and high skill occupations are going to increasingly susceptible to automation. If that happens, we'll need to replace all those jobs while still keeping up with growth in the workforce. (And of course that's on top of digging out of the massive unemployment hole we're currently in).

As Krugman notes, one economist that has done extensive work in this area is David Autor of MIT. Autor co-authored a paper that looked at how computers have substituted for labor going all the way back to the 1960s and found that, as we might expect, routine and repetitive jobs are highly susceptible to automation. Autor has found that, as a result, the job market is currently polarized: A great many of the middle-skill jobs that used to support a solid middle class lifestyle have been automated -- leaving us with high skill/high wage jobs that require lots of education and training and lots of low skill jobs with very low wages.

The problem I think we face in the future is that both the high-end jobs and the low-end jobs may erode quite rapidly as information technology advances. The key thing to understand here is that our definition of what constitutes a "routine and repetitive" job is changing over time. At one time a repetitive job may have implied standing on an assembly line. As specialized artificial intelligence applications (like IBM's Watson for example) get better, "routine and repetitive" may come to mean essentially anything that can be broken down into either intellectual or manual tasks that tend to get repeated. Keep in mind that it's not necessary to automate entire jobs: if 50% of a worker's tasks can be automated, then employment in that area can fall by half. When you begin to think in these terms, it becomes fairly difficult to make a list of jobs that (1) employ large numbers of people and (2) are completely safe from automation.

If high skill jobs that require college degrees start getting substantially automated, that will threaten an important aspect of the social contract: if there's anything left of the American Dream, it is the idea that if you work hard to educate yourself, you'll have a better shot at prosperity. If that promise comes up short, it may ultimately destroy the incentive for broad-based pursuit of education. There's significant evidence that this may already be happening: one study recent study suggests that as many as half of college graduates are ending up underemployed.

So if the high skill jobs begin to evaporate, those people will have to turn to lower-skill or trade jobs. We may see people who might otherwise have pursed advanced education competing for jobs as plumbers or mechanics. Perhaps they'll win that competition. But then what happens to the person who would have actually been a better fit for that job?

Since the middle-skill jobs are already gone, those who fail to find high skill positions will fall down the rungs and have to compete for lower skill positions. And yet a lot of these "jobs of last resort" in areas like fast food, retail and other service sectors are also going to be susceptible to automation (See this recent article in the LA Times: "Retail jobs are disappearing as shoppers adjust to self-service.")

What happens to the workers who lose the low skill jobs? Well, they won't have many options; by definition if they've been working jobs of this type for any length of time, they have no savings to fall back on. Safety nets for adults without young children are few. Many of these people will be headed for a tent city (video).

What about Consumption?

What neither Krugman nor DeLong seems to have thought much about is the impact that all this has on consumption. Rising unemployment and declining wages has to impact consumer spending and confidence -- perhaps dramatically. As I've pointed out previously, falling wages will put a deflationary squeeze on households. This is because major fixed costs such as housing (mortgage or rent), health insurance, debt, food and energy will not fall even as income does fall. This will leave average households with less and less to spend on discretionary items -- and that likely means weak demand for any business producing a non-essential product or service. And, hey, that's most of the economy. Those businesses, in turn will see increasing pressure to lay off workers or further automate.

Every product and service produced by the economy ultimately gets purchased (consumed) by someone. In economic terms, "demand" means a desire or need for something -- backed by the ability and willingness to pay for it. There are only two entities that create final demand for products and services: individual people and governments. (And we know that government can't be the demand solution in the long run). It all comes down to individual people buying stuff.


This point here is that a worker is also a consumer (and may support other consumers). These people drive final demand. When a worker is replaced by a machine, that machine does not go out and consume. The machine may use resources and spare parts, but again, those are business inputs -- not final demand. If there is no one to buy what the machine is producing it will get shut down. So if we automate all the jobs, or most of the jobs, or if we drive wages so low that very few people have any discretionary income, then it is difficult to see how a modern mass-market economy can survive that. (This is the primary focus of my book, The Lights in the Tunnel).

Some people (like CEOs of global corporations, for example) might argue that it is somehow OK to undermine broad-based consumption in the United States, because the rising consumer class in China and other emerging economies will pick up the slack. Aside from the fact that, as an American, I don't find that very appealing, I'm very doubtful of that argument for a few reasons: (1) Chinese manufacturing will automate and may do so much more rapidly than was the case in the US because they simply have to import the technology, not invent it. That will make it hard for China to create enough new jobs as millions of workers continue to migrate from the countryside to cities. (2) China is still highly dependent on exports and the US is a vital market. A major decline in consumption here will cause unemployment in China, and that will make it very difficult for the Chinese to rebalance their economy toward more domestic consumption. This is something they have been talking about for years but can never seem to pull off. If the average Chinese person sees increasing unemployment and an uncertain future, it's just not going to happen, and the Chinese economy will remain dependent on exports and infrastructure investment.

In general, I think this is a problem that a great many people should be giving serious consideration. Information technology continues to accelerate: the impact will be here long before we are ready. The fact that the first line of Krugman's post is "And now for something completely different" should give you some idea of how much attention this issue is getting from professional economists.