Why Wages Are Low and Unemployment Is High - Tech vs. Toil

On May 2, 2014, the Bureau of Labor Statistics released its latest job numbers. The unemployment rate fell by 0.4% to 6.3% - a decrease of nearly three quarters of a million people. It's a strong number that on the surface, points to a recovering economy.

This follows on the heels on the latest release three weeks ago of the real earnings for all private employees, in other words, once inflation has been taken into account. According to the headlines, average weekly earnings rose 0.3% from February to March though the increase from a year ago was a far more modest 0.5%.

Dig a little deeper though and the numbers make for more uncomfortable reading. The participation rate - the percentage of the population that is either working or looking for a job - also fell by 0.4%, implying the fall in unemployment was less a case of more jobs and more a case of more people giving up hope of employment. Since the apex of the last financial crisis in October 2008 when Lehman Brothers went bust, this number has declined by a full 3.8% - a staggering fall in the size of the workforce. Meanwhile, real wages have stagnated for nearly a decade now, rising a pathetic 3.1% since March 2006. Alongside, productivity has grown steadily, rising by 11.9%.

As recoveries go, we've had better.

The most recent financial crisis may have receded but it has also left behind in its wake a multitude of questions and social tensions. While unemployment is falling, that appears a function as much of a declining job participation rate as of plentiful jobs. We have a growing disconnect between buoyant financial markets and a more fragile real economy still in need of much TLC.

All this is symptomatic of a deeper structural issue. Since the late 1970s, the wage share - the proportion of GDP accounted for by labour - has declined dramatically while the return to capital has proportionally increased. A recent long-term study by the Economic Policy Institute shows that from 1979 to end 2012, the median worker saw just 5% growth in real terms in their pay packet, while productivity soared by 75%. The disconnect would have been larger, had it not been for the blip of the late 1990s and steep rises in compensation for top managers and the financial sector. Over that same period, we have also seen the rapid advent of information technology across all parts of the economy.

That is not a coincidence. The very nature of employment has shifted in recent decades, thanks to the rise of technology.

Technology is a boon to companies. It automates mundane tasks, creating efficiencies and enhancing profits. However, it also reduces their need for labour, leaving workers with less bargaining power and putting downward pressure on wages. Additionally, it is disruptive and can render obsolete existing sectors.

It's a familiar pattern throughout history. In the late 19th century, mechanisation led to mass production factories and key labour-saving devices such as cars and washing machines. Mechanisation also destroyed entire livelihoods such as the domestic service sector and horse carriages. More recently, the advent of the internet has impacted the business models of major high street retailers and wiped out the video rental market (remember Blockbuster?).

None of this change is bad in the long run. Progress brings benefits. The added efficiencies lead to improvements in affordability, spending power, GDP growth and quality of life. Progress also often brings enormous social benefits. As Ha-Joon Chang noted, the washing machine was perhaps the seminal invention of the 20th century. It liberated women from the strictures of Victorian wifehood and allowed them to enter the job market, unleashing a wave of feminism. Few would choose to go back to a world before cars or the internet.

However, change also takes time. People do not move instantaneously to the new opportunities born of technology. The benefits of lower pricing take time to emerge and filter through to the everyday. In the interim, jobs disappear and wages stagnate.

Today, we are in the midst of this paradigm shift. Falling real wages and rising profits are a dangerous scissors pattern that can shred social cohesion and fan populism. That social tensions did not emerge earlier is thanks to a soothing combination of falling prices (thanks to China and technology) and easy access to debt.

But future trends will exacerbate the above. Successive jobless recoveries over the last quarter century have strained the state's capacity and led to partisan taxation and welfare debates. Post crisis, companies will increasingly turn to technology to maintain and enhance earnings. The latest advances make it easier than ever to replace workers and automate ever more once human tasks, such as harvesting crops (robots) and complex engineering (3D printing). Alongside, the capacity to add more debt to the system is limited, given the vast quantum that already exists.

As jobs become harder to get and lower paying, populism risks unleashing a technological backlash. The First Industrial Revolution had Ned Ludd and his followers, who resisted in vain the loom's march and eventually were violently suppressed. The Second Industrial Revolution had the Long Depression of 1873-1879 as society adjusted painfully to the new world. Immigration became a divisive issue, high returns to capital led to the Gilded Age satirised by Mark Twain, and popular dissatisfaction birthed new ideologies like Marxism and fascism. And even in the mists of antiquity, the Roman Empire chose a technological cul-de-sac as the memories of Spartacus' slave revolts dulled their enthusiasm for progress.

Long tech and short toil will fuel growth tomorrow, but whether we are able to stomach the journey today is far more unclear. The impact of the unfolding clash between technology and toil will be bruising in the shorter term. Its resolution will be critical to the future of economic growth.