Man vs. Machines

charlie_chaplin02This post will be useful in the fall, when I hold a Principles of Microeconomics class. In that class we take a look at the market for labor, including productivity. We know that if we add a production input, like labor, but hold other inputs (like capital equipment) steady, that marginal improvements to output will eventually decline – i.e. we see declining marginal productivity. Adding more of other inputs, like equipment, can enable labor to achieve higher productivity levels.

In microeconomics we also look at the ways that labor and capital (equipment) can substitute for one another. As costs for one input rises, there is an incentive to purchase more of the other input. Decades ago the automotive manufacturers added more and more robotic assembly processes to their production, in part to deal with increasing labor costs. Catherine Rampell wrote an article and a blog post in The New York Times this week, on this topic.

In “Employers Spend on Equipment, Not Workers“, she points out,

Indeed, equipment and software prices have dipped 2.4 percent since the recovery began, thanks largely to foreign manufacturing. Labor costs, on the other hand, have risen 6.7 percent, according to the Labor Department. The rising compensation costs are driven in large part by costlier health care benefits, so those lucky workers who do have jobs do not exactly feel richer.

Labor theory suggests that as workers become more productive, the demand curve for labor shifts to the right, and should raise the equilibrium price (wages). This hasn’t been happening – in part because of high unemployment levels and an excess supply of labor. Rampell also argues that total compensation is rising – but that most of that increase is in benefit costs rather than wages.

In an Economix blog post she explores the health care benefit assertion further.

It may seem strange that the cost of labor is rising so fast. With such a weak economy, it doesn’t seem as if a lot of workers are getting raises. (Are you?)

And technically, employees are not getting much of a raise — at least not in cash. The higher cost of labor is primarily being driven by rising benefits costs and, in particular, rising health insurance costs.

[...]

[T]he benefits cost line is quite steep. Even more daunting to employers, it could get even steeper in the years ahead; health care costs are rising sharply, and their costs a year or two from now are very hard to predict.

Several take away points from this pair of articles. First – as capital equipment (particularly software-driven) improves and gets cheaper, we should expect it to substitute for labor. Second – health care costs drive so much of our economy, including the pace of unemployment changes.

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