Automation and Labor Substitution

Updated: Nov 10, 2020


David Autor

https://ideas.ted.com/will-automation-take-away-all-our-jobs/

Why Are There Still So Many Jobs? The History and Future of Workplace Automation

David H. Autor

JOURNAL OF ECONOMIC PERSPECTIVES

VOL. 29, NO. 3, SUMMER 2015

(pp. 3-30

1.  O-Ring Principle

I’ll call the first economic principle the O-ring principle, and it determines the type of work that we do.  (I call this the “expanding the pie principal”) The O-ring production function conceives of work as a series of interlocking steps, links in a chain, and every one of those links must hold for the mission to succeed.  As automation completes particular parts of the production chain, the ones remaining become that much more important. And will require more, process skilled people to do them.  Humans are process gap fillers, have been for a long time. As automation improves, there are fewer gaps to fill in existing processes, but new processes are enabled that also require gap filling. (See the next principle for why new processes evolve)

 (Remember Richard Fairbanks from Cap One that used the “ .9 ^10 “ metaphor. Meaning if a project has 10 serial steps to complete, with each step being a dependency to the next, and each step has a 90 % chance of being done, then the project only has an about 35% chance of success....I.e., .9^10. )

Moral of the story, beware of projects with many dependent steps....they must be executed flawlessly and will almost certainly be over budget and over time.  Humans will almost always be needed to close the gap. 

Example of O ring principal excerpt from Nate Silver’s The Signal and the Noise 

This new technology will not kill scouting any more than Moneyball did, but it may change its emphasis toward the things that are even harder to quantify and where the information is more exclusive, like a player's mental tools. Smart scouts like Sanders are already ahead of the curve

2.  Insatiable Principle

The second principle is the never-get-enough principle, and it determines how many jobs there actually are.  (“Invention is the mother of necessity” - Thorstein Veblen)

The iPhone is a great example, the technology didn’t (or barely) existed in 2010. As the tech (and bandwidth) has improved so has the demand for apps. In 2020, the iPhone has revolutionized how people communicate. This principle also leads to why the “Malthusian Fallacy” is a fallacy. We generally cannot see how tech will solve a problem, though it almost always does. 

https://www.aeaweb.org/articles?id=10.1257/jep.29.3.3

Robert Sapolsky does a very in-depth review of the mesolimbic / mesocortical dopamine system in his book Behave. This helps understand why people are generally insatiable as per Autor’s second principle. 

One of my favorite songs Ain’t no rest for the wicked by Cage The Elephant. The “wicked” is a metaphor for the insatiable humans:

Oh no, I can't slow down, I can't hold back

Though you know, I wish I could

Oh no there ain't no rest for the wicked


Until we close our eyes for good

HHS

https://www.hhs.se/contentassets/2a91f64953ca43b4a7f4352273d94c58/substitution-of-labor-final-4.pdf

Good framework for disaggregating tasks from jobs. 


Excerpt from Ch 4, The Subscription of Job Tasks

“Having discussed the current technological capabilities in the previous section, the ensuing section aims to relate these capabilities to their potential of substituting labor, focusing on the individual tasks that constitute jobs, rather than jobs in their entirety. The reason for this is that jobs include several different types of tasks, which all have a different relation to the current capabilities of technologies. Consequently, some types of tasks can already by automated while others cannot. Hence, it is essential to first understand which individual tasks can be substituted before one analyzes the effect on jobs and labor in general.”

McKinsey

A FUTURE THAT WORKS:

AUTOMATION, EMPLOYMENT, AND PRODUCTIVITY

McKinsey Article

Before Automating Your Company's Processes, Find Ways to Improve Them

Thomas H. Davenport David Brain

June 13, 2018

https:/hbr.org/2018/06/before-automating-your-companys-processes-find-ways-to-improve-them

But RPA can be combined with changes in the relevant business process. If the goal is to go

beyond basic labor arbitrage savings to improve the process-and it should be- then

companies need a good understanding of both their existing business processes and the new

processes they want RPA to enable before implementing the technology.

However, many companies dont do that. Their RPA implementations support the "as-is"

process, with no improvement or examination of the current process steps that are automated.  As a result, they may achieve modest savings, but in many cases they will miss out on opportunities to dramatically improve process outcomes, quality, costs, and cycle times.

8/2/20 - from the Economist “The fear of robots displacing workers has returned”

Tech-induced mass unemployment, then, seems unlikely. But there is one scenario where covid-19 could unleash the robots-if labour costs start to drift upwards, perhaps as global supply chains break down, or minimum wages rise. The reshoring of manufacturing jobs could lead to pressure to replace cheap foreign labour with robots at home. Production could no longer take advantage of low-cost labour, as America's meat-processing industry does

Years of economic dysfunction have energised campaigns for higher minimum wages and a more generous welfare state. The economic devastation wrought by the pandemic lends them momentum, like past crises, it could lay the groundwork for a new social contract. If post-pandemic policy were to enable workers to enjoy more security on

fewer hours worked, firms might then face some genuine labour

scarcity And that would really work up an appetite for disruption.”

To me, the bottom line relates to labor arbitrage. That is, as the rest of the world catches up with labor factor prices, the arbitrage narrows, as expected. This puts upward pressure on labor prices and automation labor substitutes become more viable. At the same time, the technology is improving and the costs of automation is falling. All pointing toward increased automation. The pandemic may accelerate a trend already in play. 

From the Economist, What Harm do Minimum Wages Do?

8/15/20

Economists no longer think higher minimum wages are always bad. But that is not the same as saying they are always good. In 2018 a paper by Isaac Sorkin and others cautioned policymakers to take a longer-term view, rather than worry about short-term unemployment. Its authors found that if firms perceived a higher wage floor to be permanent and unlikely to be eroded by inflation, it could encourage them to automate more and decrease employment growth in the future. The idea that a minimum wage can sometimes lead to higher rather than lower employment does not mean it always will. When pushing up the floor, policymakers need to ensure they do not hit the

ceiling.

I tend to agee with Sorkin, in the longer run, business will consider labor to automation substitution as the price of labor is higher. Also, automation tends to be very capital intensive.  Compared to labor, which has lower barriers to entry and exit.  As such, the bigger investments require an investment commitment. Once the commitment is made, it is hard to go back. 

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