Tech Leaps, Job Losses and Rising Inequality - NYTimes.

com

http://www.nytimes.com/2014/04/16/business/economy/tech-leaps-job-lo...

http://nyti.ms/1ma9jYG

ECONOMY

APRIL 15, 2014

Eduardo Porter
ECONOMIC SCENE

Its hard to overstate the excitement of tech people about what is on the verge of
happening to the practice of medicine.
Eric Horvitz, co-director of Microsoft Researchs main lab in Redmond, Wash.,
told me about a system that could predict a pregnant womans odds of suffering
postpartum depression with uncanny accuracy by looking at her posts on Twitter,
measuring signs like how many times she used words like I and me.
Ramesh Rao of the California Institute for Telecommunications and
Information Technology at the University of California, San Diego, described how
doctors using video and audio to remotely assess victims of stroke made the correct
call 98 percent of the time.
This is just the beginning. The real innovative things have yet to be activated,
Mr. Rao said. Whatever happens will be disruptive.
Thats not the half of it.
A few years ago, this kind of technological development would be treated like
unadulterated good news: an opportunity to improve the nations health and
standard of living while perhaps even reducing health care costs and achieving a leap
in productivity that would cement the United States pre-eminent position on the
frontier of technology.
But a growing pessimism has crept into our understanding of the impact of such
innovations. Its an old fear, widely held since the time of Ned Ludd, who destroyed
two mechanical knitting machines in 19th-century England and introduced the

1 of 4

6/10/2015 12:44 PM

Tech Leaps, Job Losses and Rising Inequality - NYTimes.com

http://www.nytimes.com/2014/04/16/business/economy/tech-leaps-job-lo...

Luddite movement, humankinds first organized protest against technological

change.
In its current incarnation, though, the fear is actually very new. It strikes against
bedrock propositions developed over more than half a century of economic
scholarship. It can be articulated succinctly: What if technology has become a
substitute for labor, rather than its complement?
As J. Bradford Delong, a professor of economics at the University of California,
Berkeley, wrote recently, throughout most of human history every new machine that
took the job once performed by a persons hands and muscles increased the demand
for complementary human skills like those performed by eyes, ears or brains.
But, Mr. Delong pointed out, no law of nature ensures this will always be the
case. Some jobs nannies, say, or waiting tables may always require lots of
people. But as information technology creeps into occupations that have historically
relied mostly on brainpower, it threatens to leave many fewer good jobs for people to
do.
These sorts of ideas still strike most mainstream economists as heretical, an
uncalled-for departure from a canon that states that capital from land and lathes
to computers and cyclotrons is complementary to labor.
It was a canon written by economists like Robert Solow, who won the Nobel in
economic science for his work on how labor, capital and technological progress
contribute to economic growth. He proposed more than 50 years ago that the share
of an economys rewards accruing to labor and capital would be roughly stable over
the long term.
But evidence is emerging that this long-held tenet is no longer valid. In the
United States, the share of national income that goes to workers in wages and
benefits has been falling for almost half a century.
Today its at its lowest level since the 1950s while the returns to capital have
soared. Corporate profits take the largest share of national income since the
government started measuring the statistic in the 1920s.
In a recent interview, Professor Solow stressed that his proposition of relatively
stable labor and capital shares assumed an economy in a steady state with no
systematic structural changes occurring.
That assumption doesnt seem to hold anymore. Over the last few decades
something structural might be happening to the economy that seems to want to

2 of 4

6/10/2015 12:44 PM

Tech Leaps, Job Losses and Rising Inequality - NYTimes.com

http://www.nytimes.com/2014/04/16/business/economy/tech-leaps-job-lo...

increase the capital share, he said.

Professor Solow suggests that technology is probably not the only cause of
labors declining share. He cites everyday reasons, including the erosion of the
minimum wage, the decimation of trade unions and anti-labor legislation.
But technology clearly plays a role. We will know better in 10 or 15 years,
Professor Solow said. But if I had to interpret the data now, I would guess that as
the economy becomes more capital intensive, capitals share of income will rise.
This shift is happening globally. In a recent article in the Quarterly Journal of
Economics, Loukas Karabarbounis and Brent Neiman from the University of
Chicagos Booth School of Business found that the share of income going to workers
has been declining around the world.
As the cost of capital investments has fallen relative to the cost of labor,
businesses have rushed to replace workers with technology.
From the mid-1970s onwards, there is evidence that capital and labor are more
substitutable than what standard economic models would suggest, Professor
Neiman told me. This is happening all over the place. It is a major global trend.
The implication is potentially dire: The vast disparities in the distribution of
income that have been widening inexorably since the 1980s will widen further.
This is hardly a consensus reading of the record. It is hard to make a very
definite prediction about how the capital-income share will evolve over the next 10
years, Daron Acemoglu, a colleague of Mr. Solows at M.I.T., told me. Future
technology could maybe increase the contribution of labor.
Tyler Cowen, a professor of economics at George Mason University, argues that
the very definitions of labor and capital are arbitrary. Instead, he looks around the
world to find the relatively scarce factors of production and finds two: natural
resources, which are dwindling, and good ideas, which can reach larger markets than
ever before.
If you possess one of those, then you will reap most of the rewards of growth. If
you dont, you will not.
Conventional wisdom in economics has long held that technological change
affects income inequality by increasing the rewards to skill through a dynamic
called skill-biased technical change. Losers are workers whose job can be replaced
by machines (textile workers, for example). Those whose skills are enhanced by
machines (think Wall Street traders using ultrafast computers) win.

3 of 4

6/10/2015 12:44 PM

Tech Leaps, Job Losses and Rising Inequality - NYTimes.com

4 of 4

http://www.nytimes.com/2014/04/16/business/economy/tech-leaps-job-lo...

6/10/2015 12:44 PM