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Wage Dynamics Revisited: Automation and Trade - March 20, 2018

Wages:

In last week’s TFTD we published a survey of commentary on the Phillips curve, or more specifically its apparent absence, in the context of low unemployment and low wage inflation. It’s been irking the average Fed PhD as to what exactly has been the problem, why aren’t the models working?

The easy and common scapegoat has been the looming specter of AI and Robots, workers being automated out of many tasks. An article from Axios highlighted this, summarizing a recent paper by MIT economist David Autor and Anna Salomons from Utrecht University. They conclude that automation began displacing labor decades ago but accelerated into the 2000s, further concluding that:

 “This finding is consistent with automation having become in recent decades less labor-augmenting and more labor-displacing.”

Cutting closer to the quick were Daron Acemoglu and Pascual Restrepo, whose research found:

“Large and robust negative effects of robots on employment and wages.” &

“The effects are most pronounced in industries most exposed to robots, on workers with less than a college degree, and on routine manual, blue-collar, assembly, and other related occupations.”

Great, so wage growth has been suppressed by automation, case closed? Not quite. While Trump can be all over the map, he may be right on the effects of trade. In a 2016 article on the subject in the New York Times, which displayed some impressive foreshadowing, Eduardo Porter summarized an earlier paper by none other than the David Autor mentioned above, which found that while the models classically hold that workers displaced by competition, i.e. trade, move into other industries, the adjustment isn’t quite as smooth in practice:

“At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize.”

The Times article also highlighted a paper by the same Daron Acemulgu mentioned above which found:

“Job losses from rising Chinese import competition over 1999–2011 in the range of 2.0–2.4 million.”

While there’s little doubt that automation will continue to percolate through various industries, it remains to be seen if the recent talk on trade, from tariffs to NAFTA renegotiation, can lead to changes that have an effect on the American paycheck.