By Matthew Nolan*

For many years Western countries have been complaining about manufacturing jobs being lost overseas.

However, recently it has become clear that this isn’t just happening in the West – it is happening globally.

With robots able to perform the same jobs as their human counterparts for effectively US$4/hour in some cases, what does this all mean?

Capital and labour are two inputs into a production process.

When they are used to make a good or services, they function as both complements and substitutes to each other.

Generally, for a given level of output they are substitutable – depending on wages and the cost of capital we could change the mix of labour and capital we use to create a good.

However, they also complement each other in the sense that the more capital you have, the greater the additional output a new employee could create.

As a result, although it is true that, for a given level of output, more productive capital means we need fewer workers – the fact that each additional worker can make more from this capital implies that wages are higher, and makes hiring workers more attractive. As a result, the real change in employment is not clear – all that is clear is that technology that makes capital more productive leads to greater output and income.

In order to understand the impact of a change in technology on employment, we have to ask how it fits into this relationship between capital and labour, and we have to ask how people can change their skills in order to adjust to the change in technology.

Contrary to both utopians and dystopians this process is far from clear and predictable!

For the sake of clarity, economists have been focusing on one type of technological change that is occurring across the world – the rise of robots. Noah Smith, a popular economics blogger over at Noahpion, wrote about this issue in The Atlantic.

The increasing use of robots for menial, and not so menial, tasks is currently leading to huge productivity improvements around the world.

One of the clearest areas where mechanisation through robots is driving up productivity is the manufacturing sector – where more and more items are being created, increasingly cheaply, while the number of people employed in the sector globally has been falling.

In many ways this is starting to mirror the agricultural revolution that took place in the lead up to the industrial revolution – where more and more was farmed off land using fewer and fewer workers.

The manufacturing sector has already undergone a “revolution”, the industrial revolution. The increasing mechanisation of society from the 18th century did lead to complaints at the time – with the Luddite uprisings in the United Kingdom based on the idea that machines that could be operated by low skilled workers were displacing people who had invested in specific skills.

Essentially, there were a group of people who had invested heavily in “human capital” and this capital has been made obsolete by improvements in technology.

With a similar process going on for many semi-skilled and skilled workers around the world, it is understandable that seeing your skills undercut this way is disconcerting.

However, protecting some types of workers from technological change comes with a much larger cost – the loss of income for both consumers (who could have purchased goods more cheaply) and the workers who would work with the machines.

This is exactly what history has shown us.

In so far as it is this type of technological change taking place, as a society we should be looking to help people retrain – rather than standing in the way of change.

But what about low skilled workers?

One of the concerns is that even with current technology robots can essentially work for an implied wage of $4 an hour achieving many of the same tasks that a low skilled worker can achieve. If robots could do all unskilled work for $4 an hour, where does that leave our hypothetical low skilled worker?

Even in the extreme case, where there are a set of people who could never have the skills to be gainfully employed due to the arrival of robots, the answer here is not to stand in the way of the technological improvement.

The key question to ask is how does the individual live in a society where the “reservation job” now pays a lot less? 

The simple answer seems to be that we allow people in this situation the opportunity to increase their skills, and where they can’t redistribute some of the gains from mechanisation to these people in the form of an income payment – where the income payment represents the fact that the “reservation job” that previously gave an individual a certain standard of living no longer exists.

The existence of an unemployment benefit, the existence of student loans, and the subsidisation of education are clear and consistent methods that society has already taken on board to deal with the possibility of the increasing mechanisation of low skilled work – and it is this these types of solutions that are appropriate moving forward, not an arbitrary call to stand in the way of technological innovation.

As a result, the rise of the robots is not something to fear, as long as society and the government that represents it are conscious of the changes that are occurring – and that they provide a security net for those who may otherwise lose out.

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Matt Nolan is a senior economist at Infometrics. You can contact him here »