Taking Seriously A Changed Labor Market

We assume — perhaps sometimes too smugly — that jobs lost through waves of innovation are replaced with other jobs.  In other words, dislocations are temporary as education, geographical moves and other changes help the labor force readjust to new jobs.

Steel workers become health care workers.

But what if it’s not always true — what if you have a more permanent change in the economy such that labor loses even while the economy grows?

We are increasingly seeing this question asked and the discussion as to causes and potential solutions starting.  For example, Albert Wenger of Union Square Ventures has an ongoing discussion on his Continuations blog.
Today, Paul Krugman jumps into the debate.  He hypothesizes a combination of two possible causes on labor losing out to capital:
First, he observes automation replacing labor:

About the robots: there’s no question that in some high-profile industries, technology is displacing workers of all, or almost all, kinds. For example, one of the reasons some high-technology manufacturing has lately been moving back to the United States is that these days the most valuable piece of a computer, the motherboard, is basically made by robots, so cheap Asian labor is no longer a reason to produce them abroad.

In a recent book, “Race Against the Machine,” M.I.T.’s Erik Brynjolfsson and Andrew McAfee argue that similar stories are playing out in many fields, including services like translation and legal research. What’s striking about their examples is that many of the jobs being displaced are high-skill and high-wage; the downside of technology isn’t limited to menial workers.

Second, he notes the potential effect of increased market power:

What about robber barons? We don’t talk much about monopoly power these days; antitrust enforcement largely collapsed during the Reagan years and has never really recovered. Yet Barry Lynn and Phillip Longman of the New America Foundation argue, persuasively in my view, that increasing business concentration could be an important factor in stagnating demand for labor, as corporations use their growing monopoly power to raise prices without passing the gains on to their employees.