PRODUCTIVTY PARADOX - Keynes' "Technology Unemployment" & the "Reservation Wage"

NOTE: The following has been extracted, modifed and 'reworked' from the ECONOMIST: The Future Of Jobs: The Onrushing Wave. The facts cited were excellent, however the message of the facts was misunderstood -- Gordon T Long.com

TECHNOLOGY UNEMPLOYMENT

One of the worries John Maynard Keynes admitted was a "new disease". His readers might not have heard of the problem, he suggested--but they were certain to hear a lot more about it in the years to come.

"Technological Unemployment…due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour."

'GUTTED' MIDDLE CLASS

The rise of the middle-class--a 20th-century innovation--was a hugely important political and social development across the world. The squeezing out of that class could generate a more antagonistic, unstable and potentially dangerous politics.

Some now fear that a new era of automation enabled by ever more powerful and capable computers could end badly. Across the rich world, all is far from well in the world of work. In rich countries the wages of the typical worker, adjusted for cost of living, are stagnant. In America the real wage has hardly budged over the past four decades. Even in places like Britain and Germany, where employment is touching new highs, wages have been flat for a decade. Recent research suggests that this is because substituting capital for labour through automation is increasingly attractive; as a result owners of capital have captured ever more of the world’s income since the 1980s, while the share going to labour has fallen.

Larry Summers, a former American treasury secretary, looked at employment trends among American men between 25 and 54. In the 1960s only one in 20 of those men was not working. According to Mr Summers’s extrapolations, in ten years the number could be one in seven.

This is one indication, Mr Summers says, that technical change is increasingly taking the form of "capital that effectively substitutes for labor". There may be a lot more for such capital to do in the near future. A 2013 paper by Carl Benedikt Frey and Michael Osborne, of the University of Oxford, argued that jobs are at high risk of being automated in 47% of the occupational categories into which work is customarily sorted. That includes accountancy, legal work, technical writing and a lot of other white-collar occupations.

Answering the question of whether such automation could lead to prolonged pain for workers means taking a close look at past experience, theory and technological trends. The picture suggested by this evidence is a complex one. It is also more worrying than many economists and politicians have been prepared to admit.

Previous technological innovation has always delivered more long-run employment, not less. This is going to change.

EDUCATION

Adaptation to past waves of progress rested on political and policy responses. The most obvious are the massive improvements in educational attainment brought on by:

1. The institution of universal secondary education and then by
2. The rise of university attendance.

Policies aimed at similar gains would now seem to be in order. The gains of the 19th and 20th centuries will be hard to duplicate.

Boosting the skills and earning power of the children of 19th-century farmers and laborers took little more than offering schools where they could learn to read, write and do algebra. Pushing a large proportion of college graduates to complete graduate work successfully will be harder and more expensive.

Perhaps cheap and innovative online education will indeed make new attainment possible. But such programmes may tend to deliver big gains only for the most conscientious students.

WELFARE & the "RESERVATION WAGE"

Another way in which previous adaptation is not necessarily a good guide to future employment is the existence of welfare. The alternative to joining the 19th-century industrial proletariat was malnourished deprivation.

Today, because of measures introduced in response to, and to some extent on the proceeds of, industrialisation, people in the developed world are provided with

1. Unemployment benefits,
2. Disability allowances and
3. Other forms of welfare. They are also much more likely than a bygone peasant to have savings.

This means that the "reservation wage"--the wage below which a worker will not accept a job--is now high in historical terms.

If governments refuse to allow jobless workers to fall too far below the average standard of living, then this reservation wage will rise steadily, and ever more workers may find work unattractive. And the higher it rises, the greater the incentive to invest in capital that replaces labour.

NEW WORK - Few Required & Below a Living Standard Wage

The productivity gains from future automation will be real, even if they mostly accrue to the owners of the machines. Jobs may look distinctly different from those they replace. Just as past mechanisation freed, or forced, workers into jobs requiring more cognitive dexterity, leaps in machine intelligence could create space for people to specialise in more emotive occupations, as yet unsuited to machines: a world of artists and therapists, love counsellors and yoga instructors.

PRODUCTIVITY PARADOX - Robotics, Intelligent Dispensing, Showrooming etc Doesn't Bode Well For Part Time Labor

Over the past year, unionized restaurant workers across numerous fast-food chains but mostly at McDonalds, expressed their dissatisfaction with compensation levels by striking at increasingly more frequent intervals - a sentiment that has been facilitated by the president himself and his ever more frequent appeals for a raise in the minimum wage. Unfortunately, as we have pointed out previously, in the context of corporations that have given up on growing the top line (as virtually all free cash goes into stock buybacks and dividends and none into growth capex), and in pursuit of a rising bottom line, employee wages are the one variable cost that corporations will touch last of all. But what's worse, these same unionized employees have zero negotiating leverage.

Perhaps nowhere is this more visible than in the recent strategy of smoothie retailer Jamba Juice, which in order to battle a 4% drop in Q3 same store sales has decided to radically transform its entire retailing strategy by getting rid of labor, cheap, part-time or otherwise, altogether. Presenting the biggest threat to minimum-wage restaurant workers everywhere: the JambaGo self-serve machine that just made the vast majority of Jamba's employees obsolete. Coming soon to a fast-food retailer near you.

Why did Jamba just make its retail sales force obsolete? Part of the problem is heightened competition: McDonald’s has entered the smoothie market, and others like Dairy Queen and Panera spent the summer promoting their rival drinks. Which means even less top-line growth potential. It also means that in order to push more of the top line straight to earnings, and bypass variable costs, a problem that will be faced by increasingly more corporations, Jamba's corner office had no choice but to unleash JambaGo.

Bloomberg reports:

The smoothie chain is hoping to see improvement from something it calls “JambaGo,” a self-serve machine that can be installed in cafeterias, schools, and convenience stores. Jamba Juice makes money by selling the prepackaged, pre-blended smoothie ingredients to JambaGo vendors, like a soda maker selling syrup to the owner of a soda fountain. The advantages: Jamba doesn’t need to build a store and the labor costs are much lower compared with hiring staff to concoct made-to-order drinks.

The company expects this model to help expand its brand more quickly and cheaply. Last quarter, however, revenue from the JambaGo program amounted to just about $400,000. But having recently landed a deal with Target (TGT) to put JambaGo machines in 1,000 Target Cafés, the company will soon have installed more than 1,800 machines (up from only 404 at the start of 2013). By contrast, there are currently about 850 Jamba Juice stores.

Based on a goal of $2,000 in annual revenue per JambaGo, the rough math for 1,800 machines is $3.6 million—a decent boost for a company that took in $228.8 million in revenue last year. Another 1,000 are planned for 2014, which would bring in another $2 million in annual revenue.

Here's what happens next: Jamba will do what every other company does to demonstrate that its radical strategy is successful - fudge the numbers and beat EPS for several quarters. This will happen even if JambaGo is ultimately yet another loss leader. However, its peers will watch closely and soon decide to roll out their own version of just this: a self-contained dispenser of a la carte prepared fast-food food, either liquid or solid, and in the process let go tens of thousands of their own minimum-wage employees, also known to shareholders as "costs."

What happens after that should be clear to everyone: more unemployment, lower wages for the remaining employees, worse worker morale, but even higher profits to holders of capital. And so on. Because in a world in which technology makes the unqualified worker utterely irrelevant, this is what is known as "progress."