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Wages Are Stagnating, And Robots Are To Blame: BMO

Automation, rather than globalization, has hollowed out middle-income jobs.

North America’s job markets are about as strong as they get these days, with unemployment rates in the U.S. and Canada plumbing multi-year lows.

And yet, somehow, wages are stagnant. Statistics Canada’s labour force survey shows wage growth of 1.3 per cent over the past year — barely keeping up with inflation. And that’s at the same time as Canada added a whopping 1.8 per cent new jobs, far exceeding population growth.

Looking back at the longer run, the picture doesn’t improve. A report from StatsCan earlier this year concluded that Canada's average wage, and its minimum wage, have been "essentially unchanged" since 1975. The country has seen no real wage growth in more than four decades.

Bank of Montreal economist Sal Guatieri is pointing the finger at the rise of robots. In a report titled “Wage Against the Machine,” he argues that automation — rather than globalization — is responsible for weak wage growth.

“It’s unlikely that insecurities from the Great Recession are still weighing, given high levels of consumer confidence,” he wrote. “However, automation could be a longer-lasting influence on worker anxieties and wages. If so, wages could remain low for a while, restraining inflation and interest rates.”

Guatieri cites numerous studies to argue that machines are responsible for the “hollowing out of middle-skill positions. From 1995 to 2015, the share of middle-skill jobs in OECD nations fell by nearly 10 percentage points, largely to the benefit of high-skill workers.”

But today even high-skilled workers are facing the threat of having some part of their work automated, reducing the demand for their services, Guatieri wrote.

“Artificial intelligence can examine x-rays to diagnose diseases, recognize investment patterns to customize portfolios, and mine “big data” to write analytical reports, thereby doing tasks performed by radiologists, financial planners and journalists (and, gulp, even economists!).”

Guatieri predicts this process will accelerate as the cost of machines goes down. He cites a study projecting that the cost of an industrial robotics system will fall from $28 per hour today to less than $20 in 2020, “which is below the average worker’s wage.”

'High anxiety and low wages may be the new norm'

Still, it’s the lowest-earning positions that are most vulnerable to replacement by machines. “The defining feature of a job at risk from automation is repetition,” Guatieri noted.

He stressed that automation is hardly the only thing keeping wages down. Everything from low productivity growth to declining unionization and intense retail competition is helping keep wage inflation in check.

And it may be that fear of being replaced by a machine is keeping people from asking for a raise, Guatieri wrote.

“Longer-run, the payoff from increased automation will be higher productivity and better wages for high-skill workers. For others, high anxiety and low wages may be the new norm.”

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