week 4+5: automation anxiety Flashcards
What is automation anxiety?
A long running concern in economics + society, that technological change will destroy jobs and create unemployment
A related concern is that technological change will do what to workers’ wages?
Drive down workers’ wages and increase inequality
Concerns about automation have a long history, give some examples
- The knitting frame in the late 16th Century
- Luddites in the early 19th Century
- J.M. Keynes in the 1930s spoke of “technological unemployment”
- Pres. Johnson commission in the 1960s
What did Frey and Osborne say about automation anxiety?
47% of US jobs are “at risk”
Mechanical knitting machine invented by who?
William Lee in 1589
Why did queen elizabeth refuse William Lee a patent?
Lee made the mechanical knitting machine and the queen refused him because “Consider thou what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment”
What did experts say to president Johnson in 1964 to confront the “productivity problem”?
The productivity problem is that productivity in that period was rising so fast it might outstrip demand for labor.
The commission said that automation did not threaten employment
“The basic fact is that technology eliminates job, not work”
What were the top 3 endangered jobs found in the study done by Frey + Osborne in 2017?
- food preparation
- construction
- cleaning
What are the impacts of more automation?
- It changes industries people work in
- Changes the jobs people do
BUT it doesn’t decrease employment rates
new technologies clearly _______ labour
displace
New technologies DON’T just destroy jobs because…? [3]
- Technology may make other workers more productive
- Technology may create new jobs entirely (the flipside of displacement)
- Increased demand through lower prices and new products
What other factors should we consider about automation?
★ Labour supply decisions (changing wages causes workers to move)
★ Demand elasticities (changing prices and income causes consumers to shift demand)
★ Adjustment costs: moving workers from displaced jobs to new jobs
2 types of technological change may affect the labour market
- Product **demand shifts ** caused by the invention of new products
- *Changes *in the **production process ** caused by the invention of new processes or new inputs
We will focus almost entirely on the second one (this is what we mean by “automation”)
Define a production function, what do we write generally?
Y = f(L,K)
To think clearly about automation we need a ..?
Model
How can we represent the production function?
Using isoquants
What is an isoquant?
An Isoquant describes all combinations of K and L which produce the same level of output
What properties do Isoquants have? [4]
- downward sloping
- do not intersect
- higher isoquants have higher Y
- convex to the origin
The slope of an isoquant is given by…?
Change in K/Change in L
The absolute value of the slope of an isoquant is called…?
MRS, Marginal Rate of Substitution
Convex isoquants imply …. between L and K
A diminishing MRS
Equation that describes the firm’s cost of production?
C = wL + rK
The isocost is what?
A line connecting all points with equal cost
It shows all combinations of inputs which cost the same total amount
Rearranging in the same (K, L) space as the isoquant, we get:
K = C/r - w/r*L
The intercept is of the isocost?
C/r
(the amount of capital the firm would use if L = 0)
The slope of the isocost line is the …?
ratio of input prices
Formula for point of tangency (where cost of producing a given level of output is minimised) ?
At the point of tangency (lowest point on isoquant where it meets isocost)… what equals what?
Slope of isoquant equal to the slope of the isocost
A profit maximising firm will …?
Minimise costs
Cost minimisation requires that the last £ spent on labour is as valuable as the what?
The last £ spent on capital
BUt minimising costs DOES NOT imply profit maximisation why?
Determined by the MC=MR condition.
In summary, while minimizing costs is crucial for efficiency, it doesn’t guarantee profit maximization. Profit maximization depends on finding the output level where marginal revenue equals marginal cost. This ensures that the firm maximizes profit by balancing the additional revenue earned from producing one more unit with the additional cost of doing so.
The model tells us how many workers and how much capital the firm uses given:
- the available technology (the production function)
- the prices of workers and capital
How can we add technological change to this model?
The simplest idea: technology changes relative factor prices
Technological change does not change the production function itself, but instead changes …?
the price of factors of production
for example, technological change makes K cheaper
If technological change makes K/L cheaper,
what happens to firm’s demand for L and K?
The outcome depends on whether the inputs are substitutes or complements in production
How large is the substitution effect?
depends on the curvature of the isoquant
What is the substitution effect?
How easily can firms replace workers with machines?
The responsiveness of factor demand to changes in factor prices is measured by what?
The elasticity of substitution
What is the formula for elasticity of substitution?
If inputs are perfect substitutes then elasticity of substitution equals..?
infinity
If inputs are perfect complements then elasticity of substitution =?
0
How can we extend the basic model to incorporate many inputs?
E.g add “skilled” and “unskilled labour”
What would be the production function if we had more inputs?
Y = f(X1,X2,X3…Xn)
What happens to the demand for input i when the price of input j changes?
Depends on the size of substitution and scale effects
e.g
☆ Computers get cheaper, meaning firms substitute away from workers
☆ But output increases so firms use more computers and workers
The cross-elasticity of demand is…?
If cross-elasticity of demand is positive, then i and j are…?
XED POSITIVE : i and j are substitutes
If cross-elasticity of demand is negative, then i and j are…?
XED NEGATIVE : i and j are complements
Unskilled labour and machinery are often thought to be ———-?
Substitutes
unskilled labour+machinery =substitutes
So if capital gets cheaper, firms use _____ unskilled labour
Less
XED > 0
skilled labour+machinery often thought to be complements
So if capital gets cheaper, firms use _____ skilled labour
More
XED < 0
what are complements?
when the price of one good increases, the demand for the other good decreases
Why might technological change not be a threat to unskilled workers?
- Technological change is *not always * and everywhere a subtitute for unskilled workers
- Scale effects can be very important
So, to sum up: The effects of technological change on labour depend on …?
substitution and scale effects
To summarise: one can model technological change as…
a change in factor prices
What is the most important feature of technology?
Technology also changes what we can produce from a given set of inputs and how we can substitute one input for another
In other words, technology can change what?
The production function
^ This is the most common way economists think about tech change
Suppose we write the production function as: Y = f(S,U) what is S + U
S = skilled labour
U = unskilled labour
Why would we make the production function Y = f(S,U) and what happened to capital?
What are some additional terms in the technological change as changes in production function function
define factor-augmenting technological change
technological change that increases the productivity of high or low skill works (or both)
what happens when Aˢ (efficiency of high skilled labour in producing output) increases?
technology may increase demand for skilled labour, depending on the elasticity of substitution between S+U
Let’s suppose S and U are complements - Leontief production function:
Making S workers more productive means that firms need ____________ to produce the same output
Less of them
As S + U are complements, if skilled workers are more productive and firms require less of them to produce the same output,
what does this mean about increases in A^s?
Good for unskilled workers as firms require less skilled labour
But what would seem more plausible about the relationship between S + U?
That they are substitutes in production.
If S + U are substitutes, then if S becomes more productive (A^s) increases, firms will use …?
more of them
Summary: we’ve used a v. simple production func. to describe TWO types of technological change:
- changes in relative prices (e.g computers get cheaper - change in price of K)
- changes in relative factor productivity
(e.g computers make skilled workers more efficient - increase in A^s)
In conclusion, “automation” affects _______ demand
Automation affects labour demand:
- which types of workers firms employ
- how many workers they employ
The precise effect of automation on a particular type of worker depends on…?
elasticities of substitution
But neither of these models allows for the possibility that…
AUTOMATION directly REPLACES WORKERS
Now we consider a 3rd approach to modelling automation
Machines directly replace humans
the traditional approach:
production function has factors of production which are combined to produce output
What is factor augmenting technical change?
where technological change is thought of as something which makes factors of production more efficient
The third approach states that:
Production requires a range of tasks
☆ each task can be assigned to humans/machines
☆ technological change is an expansion in the set of tasks which can be done by machines
In the task-based approach, what’s the main idea?
That machines directly replace humans in certain tasks
What is the displacement effect?
Displacement effect reduces the share of labour used in the production function
What is the productivity effect?
Automation also increases productivity, which increases demand for labour in non-automated tasks
What is the reinstatement effect?
Technological change also creates new tasks which are performed by humans (atleast initially) e.g
Bank tellers + ATM
Tasks that cannot be substituted by automation are often _________ by it
complemented
– O-ring production function
What tasks can be automated?
Tasks which are routine and can be understood as a sequence of steps which can be written down and AUTOMATED
So technological change isn’t necessarily “skill-biased” but rather…
Routine-task biased!
What is routine-task bias?
Where machines directly replace workers doing routine or codifiable tasks.
These workers don’t necessarily have the lowest skill
What kind of jobs have higher proportions of routine tasks?
Jobs in the middle of the skill and wage distribution have higher proportions of routine tasks
e.g clerical jobs + repetitive production tasks
What are abstract tasks, routine tasks + manual tasks?
abstract - jobs at the top of the skill distribution often require problem-solving, intuition
routine - jobs in the middle of the skill + wage distribution
manual - jobs at the bottom of the skill distribution often require situational adaptability, visual + language recognition
Splitting jobs by skill distribution can lead to a prediction of what?
Employment polarisation
In most models we consider, the labour market —–
clears
What does it mean by the labour market clears?
changes in relative demand causes change in relative wages
+ technological change doesn’t affect unemployment in the medium term
why might technological change cause unemployment??
suppose there are 2 types of worker as before: S and U
☆ let r be the ratio of skilled to unskilled wages
r = wS/wU
☆ let p be the ratio of skilled to unskilled employment
p = Ls/Lu
Suppose that in the SR, the **relative supply is fixed **
– ☆ (vertical relative supply curve)
the relative demand curve is downward sloping(Why?)
New technology displaces some workers due to what effects? but may also create new jobs due to what effects?
Substitution effects
Complementarity + scale effects
Technology displacing workers may have effects on ____________?
relative wages as the labour market clears
what about the wider economy effects? 2 other factors determine whether a technological change will shrink or expand an industry:
- ☆ labour supply elasticity - how do workers respond to changing wages? ☆
- ☆ demand elasticity - how do consumers respond to changing prices and income? ☆
Draw an isoquant
Draw a cost minimisation diagram
How to work out MPL + MPK?
Illustrate a change in factor prices through diagram
Draw isoquants when inputs are perfect substitutes or perfect complements
What is skill-biased vs routine-biased technical change?
Skill-biased technical change is a shift in the production technology that favours skilled over unskilled labour by increasing its relative productivity and, therefore, its relative demand.
In routine-biased technical change, technological advancements primarily affect tasks that are repetitive, routine, or predictable in nature.
What do we mean by empirical evidence?
- How economists have used data to test their theories
- Measuring the effect of tech change on labour markets
How have economists used data to test their theories?
- Wage inequality
The model suggests that the wage premium should go down IF relative supply increases.
What is the wage premium?
The wage premium is the extra amount of money people with certain skills or qualifications get paid compared to others.
Model Predi
Katz and murphy estimated this.
They found that B2 was negative, which means…
Increase in relative supply do lower relative wages
Katz + Murphy also found that B1 was positive meaning that…?
DEMAND was shifting each year in favour of high-skilled workers
But the model doesn’t tell us why B1 is postive, but it tells us over time, the demand for S, relative to U workers, is increasing
Model for wage inequality and technology?
model is very simple: assumes the rate of technological progress is constant
technology not directly measured - just assumed
consistent with SBTC, but also w other theories
employment of non-production workers _______ in 1970s + _______ in 1980s
increased in 1970s, accelerated in 1980s
+ employment of production workers in manufacturing fell
Did this shift occur within or between industries? [Increase in demand for skilled workers]
Within industry
Why does it matter wether it was within or between industries?
Skill upgrading is positively associated w investment in computers + R+D expenditure
Doms, Dunne + Troske (1997) - created a micro study to find out what?
Effect of technology on firms
What did Doms, Dunne + Troske (1997) find?
They held a survey of manufacturing plants which asked about their use of automation equipment e.g., computer automated design
☆ Firms which use these new technologies employ a larger fraction of workers in scientific, engineering, managerial and precision-craft occupations ☆
Correlation or Causation? (Technology effect on firms.)
A time-series evidence suggests investing into these new technologies doesn’t actually increase the employment of high-skill workers
Job polarization is ….?
when there’s more growth in high-skill and low-skill jobs, but fewer opportunities in the middle
It is widely accepted that automation does displace workers, EVEN if _____________
the aggregate effect is positive
How long does it take displaced workers to find another job?
Does displacement have long term effects?
In summary: there are 3 ways in which technological change is modelled, these are…
- changes in factor prices - ”computers get cheaper”
- factor augmentation - “computers make skilled workers more productive”
- task replacement - “computers replace workers who do routine tasks”
To some extent, each are similar, how?
- Technology increases output
- Benefits some workers, but harms others (at least in the SR)
What are some policy issues associated with automation?
- education
- worker mobility
- income redistribution and compensation
- universal basic income
