The past ten years have seen widespread concern about the effect that artificial intelligence (AI) and sophisticated robotics might have on employment. The most pessimistic prognosticators assert that strong and agile robots will be able to perform all physical tasks at lower costs than human beings while computer systems driven by AI will be able to perform all mental tasks at lower costs than human beings. Under this doomsday scenario, every job on the plant will be automated and every person will become unemployed. Such fears are stoked by videos that demonstrate the great agility and strength possessed by cutting edge robots, in this case the Atlas robot built by Boston Dynamics:
The pessimists pushing the doomsday scenario are not, however, without critics. These optimists point out—correctly—that every new wave of technological innovation since the start of the Industrial Revolution 250 years ago was met with pessimistic predictions that failed to materialize. New technologies do make particular jobs obsolete (wagon makers, for instance) but new jobs in new industries (such as autoworkers building cars) have always arisen to provided not only replacement jobs but higher wages as well.
A key point is that when a new technology comes along, it is easy to see the currently existing jobs that might be displaced, but it is very hard to predict the new jobs that will come into existence as a result of the new technology. As just one recent example, digital cameras killed off millions of jobs producing and processing film for photos and movies. However, once digital cameras were attached to smartphones, entire new job categories developed, including “social media influencer” and “social media consultant.” The new jobs not only pay better on average but are often more pleasant as well. This can be seen in this short video interview with the founder of Creator Burgers in San Francisco, which developed a specialized cooking robot that eliminated the need for burger-flipping human cooks.
Because the Creator robot took over over the boring and repetitive task of preparing hundreds of burgers a day, Creator’s human employees have been freed to engage in much more pleasant tasks, like customer service. They are also getting paid more than they would at a traditional hamburger restaurant.
But even the optimists recognize that many technology transitions don’t go so smoothly. In many cases, workers who are displaced by new technologies are not immediately hired into the new jobs made possible by the new technologies. Many of the displaced workers will need substantial training to be able to perform the new jobs and quite a few may have to move to new cities or states to work in the new industries created by the new technologies. This suggests an important role for government in providing low-cost educational opportunities and income support while people train for new jobs and in some cases move to new locations to take those jobs.
In terms of basic economics, new productive technologies have two major effects, one of which happens immediately in product markets and another that happens more slowly in labor markets. The immediate effect in product markets is that the cost of goods and services falls, other things held equal. That is because the new technologies reduce production costs, thereby making firms willing to supply a larger quantity at any possible selling price. That shifts the supply curves for goods and services to the right, generating lower equilibrium prices for goods and services, all other things held equal.
Anyone who has not had their job displaced by a new productive technology will, consequently, experience nothing but benefits because they will get to keep their old jobs and wages while also enjoying lower costs for goods and services. Their real standard of living (how much they can buy with their income) will rise.
The slower effect is that, on average, wages and salaries will rise, too. This is because the new jobs that displace the old jobs that are destroyed by the new technologies will be more productive and profitable for the firms that utilize the new technologies. Those firms will enjoy plentiful sales, thereby providing them with plenty of money to compete for workers who can operate the new technologies. That competition for workers will drive up wages.
Viewed in terms of supply and demand, the demand curve for labor shifts to the right as the new technologies reduce production costs and increase productivity. With the overall supply curve for labor fixed (by the number of people alive and willing to work at any particular moment), the result is higher equilibrium wages as the demand for labor increases while the supply of labor is fixed.
But this transition can be slow and uneven due to the need to retrain workers whose jobs are displaced by new technologies. So while all people instantly benefit as consumers, those whose jobs are displaced by new technologies may suffer substantially depending on how long it takes for them to land new jobs. But the overall historical trend favors the optimists. Every past technological advance has reduced the cost of goods and services in the short run while delivering higher wages and salaries in the medium to long run. The overall trend is higher wages, lower prices, more interesting jobs, and more engaging goods and services.
Survey Level Questions
1. Read this debate between an optimist and a pessimist and then answer the following questions:
- Does the pessimist, Carl Benedikt Frey, think that every job in the economy is at risk? Does he believe that that the workers who will lose their jobs to AI in coming years will necessarily end up permanently unemployed?
- How does the opinion of the optimist, Robert D. Atkinson, differ from that of the pessimist with regard to how quickly AI productivity improvements will translate into higher wages? Why does this matter so much?
- Do the pessimist and the optimist agree on the fraction of currently existing jobs that are susceptible to being displaced by AI? By how much do their estimates vary?
- After reading the debate, what do you think is likely to happen with AI displacing jobs? What do you think the government should do about it?
Principles Level Questions
1. Suppose a new green technology reduces the cost to produce electricity but in doing so reduces the demand for coal used by older electric plants. Use supply and demand diagrams to answer the following questions. For simplicity, assume that all markets are perfectly competitive.
- What will happen to the market equilibrium price of every good or service that utilizes electricity as an input?
- What will happen to the market equilibrium price and quantity of coal produced in the economy?
- What will happen to the demand for coal miners? To their wages and to the number of coal miners employed?
- If the government provides job training so that every coal miner who lost their job gets a job elsewhere in the economy, what will happen to the supply of coal miners and thus to the equilibrium wages of coal miners? Will the wages of coal miners be higher than, equal to, or lower than what they were before the new technology arrived?
2. Continue thinking about a new green technology that reduces the cost to produce electricity.
- With lower electricity costs all over the economy, what will happen to the production costs of every company in the economy that uses electricity as an input?
- Will firms that enjoy lower production costs be able to afford to hire more workers?
- What will tend to happen to the overall demand for labor and thus to wages and salaries across the economy?
McConnell 22e Chapters (tags)
Chapter 2 (The Market System and the Circular Flow)
Chapter 3 (Demand Supply and Market Equilibrium)
Chapter 15 (Technology, R&D, and Efficiency)
Chapter 16 (The Demand for Resources)
Chapter 17 (Wage Determination)
Chapter 23 (Income Inequality, Poverty and Discrimination)
Chapter 28 (Economic Growth)
Chapter 29 (Business Cycles, Unemployment and Inflation)
McConnell 22e Learning Objectives (tags)
LO2.3, LO3.5, LO15.4, LO15.7, LO16.3, LO17.1, LO17.2, LO23.2, LO28.3, LO29.2
Cited News Articles
“Will AI Destroy More Jobs than it Creates over the Next Decade?” April 1, 2019, The Wall Street Journal. https://www.wsj.com/articles/will-ai-destroy-more-jobs-than-it-creates-over-the-next-decade-11554156299
Videos Linked To
Creator Hamburger Video https://www.youtube.com/watch?v=CbL_3le40qc
Boston Dynamics’ Atlas Robot Video https://www.youtube.com/watch?v=_sBBaNYex3E