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…?