Limits to Employment Participation, and Societal Change
Politics / Employment Apr 11, 2014 - 01:44 PM GMTBy: Submissions
Raymond Matison writes: Ever since the calamitous financial meltdown in 2008, economists, market analysts, and media pundits persistently have envisioned an economic recovery, with an attendant increase in employment. However, critics maintain that such a recovery has never really occurred – prompting the pundit response that ours is a jobless recovery. Recently, President Obama promoted raising the minimum wage, and increasing payment for overtime work, as a means to help provide a higher wage for workers. This effort is good politics, but is not really a sound bureaucratic practice. The direction and future of unemployment is easy to see, as is the future employment participation rate, and the resulting direction of national income. Globally embedded, strategic economic trends are more powerful than presidential edict and the Federal Reserve Bank, and so economics will trump central planning. This article discusses a possible outcome of these trends.
In 1979, Alvin Toffler published his insightful, futuristic book entitled “The Third Wave”, which dealt with societal changes driven by human development from an agricultural age spanning the last ten thousand years, to the industrial age which covers the last three hundred years, to the current information age which started roughly in the 1950’s. Each economic “wave” created and supported its own unique societal system, institutions and governance. Those societal changes have been long-lasting and profound, and all three of these waves are still washing over different parts of the globe at varied rates mixed in different proportions. Advanced economy nations are functioning almost fully in the information age, while some undeveloped nations still seem challenged just to improve crop yields to avert famine. One important part of the author’s thesis is that trying to address or solve an economic problem endemic to the post-industrial information age with solutions of the industrial age is self-defeating and will not work. Increasingly, the problems evident in our present economy will need to be solved by post-industrial solutions – for we are living in a post-industrial world. This concept is applicable and extends also to understanding our stubbornly high unemployment rate and reduction in the job participation rate.
U.S. Agriculture since 1850
Consider first America’s evolution from an agrarian culture. Over the last 150 years our U.S. population has grown dramatically, increasing from just 23.2 million in 1850, to an estimated 317.5 million people in 2014. Historical statistical records suggest that in 1850, more than 70% of that population was involved in agriculture. By the year 1900 our population had expanded to 76.2 million, but only 41% were deemed to be working in agriculture. This radical decline in the proportion of agricultural workers to the total population continued over the next century. By 1950 our population had increased to 151.3 million, but the proportion of people working in agriculture had declined to just 14%. After the Second World War, due in part to continuing scientific advancement related to the war, crop yields started to rise dramatically. As a result, while our population had grown to 281.4 million in the year 2000, just 1.9% of the population was necessary for crop production.
Multiplying the number of people in the population by the agricultural work participation rate, we can get a rough estimate of the actual number of people to have worked in agriculture historically. Thus, in 1850 more than 16.6 million appear to be working in agriculture, while by 1900 this number of workers had risen to 31.2 million, but declined to just 21.2 million by 1950, and continued to decline further to 5.3 million by the year 2000.
It is not extraordinary that in a rapidly growing population with increasing agricultural know-how the employment participation rate in agriculture would decline; but note that the actual number of people working in agriculture declined despite a 12 times increase in population over this period. Even more amazing is the fact that the production of agricultural products multiplied at a rate substantially greater than population growth. For example, corn production rose from less than 600 million bushels in 1850 to more than 13.0 billion bushels in 2013 – an increase of 21.8 times, far outstripping population growth over this period. Noteworthy is the fact that this greatly reduced number of agricultural workers not only provided all the grain needed to feed the population, but America also became a large grain exporter.
As a result, many millions of people have been “displaced” from farm work over these years. For example, if we applied the 1950 agricultural work participation rate to today’s population, there would be an additional 38 million people working in agriculture. So had it not been for other industries needing workers, our unemployment rate today would be catastrophically high. The lesson to be learned is that due to increasingly sophisticated industrial machinery, scientific advances and agricultural know-how, the country did not need all of the previously required agricultural workers to feed the nation.
Changes in employment through the 1900’s
As industrial manufacturing expanded during the 1900’s, it was possible to absorb many of the displaced agricultural workers into manufacturing. Concomitant with the expansion of manufacturing jobs, there also was a significant increase in government and other white collar jobs. Over the years 1960-2002, manufacturing employment had peaked at 19 million workers, but by 2012 the number of workers in manufacturing had dropped to 12 million. Over most of these earlier years America was a net exporter of goods to the rest of the world. In addition, we can note that while population more than doubled over this period, our manufacturing base had provided all the products that the nation needed, with a decline in the actual number of workers. As in agriculture, with advances in technology the trend for the number of workers needed in industry and manufacturing has declined and will continue to decline in the future.
In the last half of the 20th century highly productive new jobs opened in electronics and technology, together with a large expansion in the service industry. Thus, the displacement of earlier generation agricultural workers into manufacturing repeated itself in the manufacturing sector, whereby lost manufacturing jobs were absorbed by the technology and service industries, and government, as white collar workers for the first time were greater in number than blue collar workers.
Over the last century there has been persistent growth in federal, state, and local government jobs. Reliable statistics are available only from 1939 as collected by the Bureau of Labor Statistics. It was with the central planning needs of a government providing for goods and services during the Second World War that the bureaucracy really started to expand. For example, the number of persons working in government in 1940 was 4.3 million, but increased to 6.1 million representing a 44% increase over the next ten years. By 1970, the number of government employees rose to 12.7 million, representing a 107% increase. By the year 2000, there were 20.8 million persons working in federal, state, and local governments, a further 64% increase. This bureaucratic trend continued after the new millennium, such that government workers by the year 2010 numbered 22.5 million persons.
Comparing these government worker statistics with those of agriculture, we can see that while the number of persons working in agriculture between 1950 and 2000 declined by 15.9 million persons, the number of workers in government increased by 14.7 million persons over this same period. Over this fifty year period, the portion of government workers as a percentage of the population has increased from 4.1% to 7.4%.
The new unemployment
The new industry forcing slow but unrelenting job displacement is that of increasing automation and advanced robotics. Most have seen old historic pictures of human welders working in automotive plants who had the responsibility to weld car frames for hours without error. These workers have been replaced by robotic arms which never tire, never make welding mistakes, never ask for coffee breaks or lunch hours, and are willing to work beyond the eight hour day without payment of overtime, social insurance benefits, or labor union dues. Thus, the effect of improved automation and technology is to reduce the number of jobs in industry and manufacturing.
We all have also experienced the reduction of bank tellers with personalized service and replaced by impersonal but effective automatic cash machines. In driving on toll roads it is all but impossible not to notice that many toll booth attendants have been replaced by electronic transponders that automatically deduct toll charges from an electronic account. At grocery stores there has been a reduction in the number of check-out attendants due to the improved efficiencies driven by bar-coding. Technology advances in the airline industry made it possible for us to reserve and book our own flights without service personnel assistance, and even to choose our own seating assignments. There are many other such examples – all of which demonstrate that the number of workers necessary to provide such varied services is declining. The trend associated with advancing technology is to reduce the number of jobs and workers needed to fill those service jobs.
What happens when 10-20% or no more than 30% of the population, with the help of technology can produce all the food and all of the manufactured goods and services needed by 100% of the population in the U.S., or any other country? What are the implications for our future society with such high productivity and reduced requirements for workers to produce for our needs? How can one country, or the world, have “full employment” when only a small percentage of workers is required to produce everything that is needed by that society? What happens to a society when majority of its workers are simply NOT NEEDED to produce for the needs of its population? It signals a tsunami of social change to occur over future decades.
Several years ago, the Federal Reserve announced a policy that it will keep interest rates at record lows, until the unemployment rate drops to an acceptable level.
This unrelenting stimulus to artificially keep interest rates low until unemployment improves is a seriously misguided policy. Indeed, this policy does more to impoverish the vast population as interest income in personal savings accounts and all corporate and government pension funds earn insufficient returns to adequately fund those promises. The gargantuan, persistent budget deficits, sustained by massive and unprecedented government borrowing - none of which the citizens would approve if subjected to vote are nonetheless the ultimate liability of taxpayers to their detriment. Central bank policy does not help reduce unemployment, but more perversely it exports jobs overseas and impoverishes our citizens. The only “benefit” of such a policy accrues to the government by reducing the nominal value in government debt by the amount “saved” through inflation driven deflation of the dollar, which necessarily reduces the wealth of tax payers by the same amount. In effect, it is one additional but a hidden tax. The total effect of these wrong-headed but persistent policies on citizens is devastating.
Our government uses sanctions and currency warfare against other nations as a means to reach its objectives in foreign policy and to maintain hegemony. However, policies increasingly over the last decade by government, bureaucrats, politicians, and the Federal Reserve appear to be waging a financial war against its own citizens. Their persistence to maintain an environment of low interest rates will clearly not reduce unemployment, for in our post-industrial age low interest rates encourage job movement to low wage countries. The source of increased unemployment and a decreasing work participation rate in the U.S. comes from increased automation, robotics, and jobs moving to developing nations as multinational corporations are offsetting high domestic wages with low-priced labor overseas as a means to increase profits. In this new environment, low interest rates cannot possibly improve U.S. employment.
Confused Political Solutions
One important mandate corporations have is to increase their profitability by whatever legal means possible. When wages get too high, corporations established with goals of ever increasing profits, will seek ways to reduce increasing costs and improve efficiency by reducing increasingly expensive human labor, which in addition to bureaucratically inflated wages require workmen’s compensation, health insurance, and pension contributions. Evidence in the workplace suggests that the more relentless is the drive by well-intentioned people to mandate a higher wage for workers by instituting minimum wage laws or through collective bargaining by unions, the greater is the incentive for corporations to replace the human laborer with a machine. The incentives to replace human labor ultimately becomes such a great motivator that corporations will objectively seek to replace humans with machines or robots. One recent anecdotal incident involves the quest by employees of McDonalds to dramatically increase their wages – only to have one company offer a robotic machine that can cook over 350 hamburgers per day. Consider the effect that these machines and robots will have on employment as advances in artificial intelligence allows them to become more autonomous and they increasingly will be able to perform more functions previously requiring humans.
Therefore, the intent of well-meaning bureaucrats and politicians to increase worker wages by mandating an increased national minimum has a very undesirable unintended consequence. In this sense, leaving a market alone without regulatory interference would in the long run be more beneficial to the work force in terms of employment participation rates rather than mandating wage levels which promote automation, and produce effects diametrically opposed to their intended goal. The facts are that mandated minimum wages increases unemployment and decreases hires, and unfortunately of that specific segment of society which finds it hardest to get jobs yet need incomes most.
Emerging Future
We can anticipate that hiring by established, increasingly automated companies will remain low, regardless how the economy is perceived to be doing - and concomitantly the job participation rate will continue to decline. This means that the unemployment rate, if measured on its originally defined basis, will remain stubbornly high, and will increase rather than decline. In addition, one clear incentive for reduced hiring and reduced number of hours offered for work is the Affordable Care Act, which penalizes companies which offer full time employment of more than 30 hours per week. These forces will reduce both wages and employment for decades to come. In addition, the participation of billions of new workers in global production which are willing to work at a small fraction of wages paid in the U.S. also guarantees that our national income adjusted for inflation will continue to be under pressure and decline over time. Yes, the top 1% or 10% of innovators, the movers and shakers, will increase their earnings based on their contributions to new manufacturing efficiencies or product creations, but job availability and incomes for the rest will remain under pressure to decline.
The globalization of agriculture and manufacturing means that whatever jobs are available in these industries - have and increasingly will be filled by workers in developing nations at a low wage. This upheaval is global, and will also displace or destroy the dreams of many in the world which are at the bottom of the economic ladder in both developed and developing nations. Many of the billions of people in developing nations hope that as a result of globalization, they may get jobs that provide a higher income and an improved standard of living. Some certainly will benefit by taking jobs whose wages are low, but yet much higher than they experienced before, when no such jobs were available. But the vast majority of these global workers may never be needed as continuing productivity improvement in agriculture and manufacturing produce all the grains and manufactured goods for our global citizens. Eventually, as much as 70% of the global workforce could be idle as 30% provide all the goods, products and services that the world population needs.
This post-industrialization information age era has induced a unique transformation on the multinational corporation. Unlike monarchies and nation states that controlled activities within its borders, globalization with companies transcending national borders makes for a new kind of governance – the corporate monarchy. Many multinational companies have resources greater than that of individual countries, and therefore, are able to influence the legislation in foreign sovereign countries. Accordingly, these large companies, individually and collectively, exercise considerable power within every sovereign nation state. They are the new ruling partners in previously truly sovereign countries. By extension, they are a part of the “global ruling family”. Since they are large producers, they will also determine where or which country or city the new jobs will be available.
Role of education
If people are to hope for a good job, they will need improved technical skills and better education in the sciences, while the most productive workers will have a high level of advanced scientific and tech knowledge. From international science and math competitions, we know that our schools are producing students with inadequate skills in both areas. This does not bode well for U.S. leadership in scientific innovation and continuing technological advances. However, the irony is that if the U.S. was developing every student with the requisite math and scientific knowledge, our industry could not accommodate everyone with a job, despite outstanding qualifications.
One possible result of these limits to employment for both the technology savvy, and inadequately educated jobseekers is that society will evolve to split into distinct knowledge and income groups. The best jobs and income opportunities will be available to those who are the tech savvy producers. Jobs will be available at more moderate compensation to the moderate skill workers and service providers, while the under-skilled uneducated and unemployed masses are likely to become dependent on welfare. If we are to avert the turmoil that comes from social disenfranchisement and dependence, broad income redistribution is implicated. Thus the 20-30% involved in production and service will either fund welfare for the other 70%, or there is the potential of social chaos – unless another solution is found.
A century ago, people had more skills to live off the land, fend for themselves, and thereby were more independent. Those skills have been lost as people moved from the farm to the city. Therefore, a less likely outcome is that the unemployed will somehow fend mostly for themselves. When the majority of citizens are no longer needed in the workforce, they still will retain significant voting power, and therefore they will remain an important part in shaping that future society. In such circumstances, neither a republic nor democracy may provide the optimum form of governance, which portends a social dark age highlighting the differences between the 30% workers (taxpayers) and all others.
With inexpensive, distributed computer learning there exists the possibility that these unemployed masses, with ample time available together with comfort of welfare support could usher in a new wave of mass growth in self-education. Indeed, the whole education system could change dramatically, as the acquisition of knowledge does not require attending a university, but requires the confirmation of specific knowledge made easy with today’s internet. While some fields of study seem to require laboratory experience (such as medicine, biology, electronics to mention just a few) the advance of virtual reality may even make these laboratory experiences available in the home of the student in the future. So, in this sense the bricks and mortar type of education system with its high embedded cost related to property maintenance and tenured high cost instructors is as much at risk as is the bricks and mortar retail store. Thus, programmed internet instruction portends a coming rise of unemployment in academia. What has to drive this kind of initiative and development is the desire for people on welfare to self-improve. Unfortunately, that requires certain fundamental values which the concept of being on welfare does not provide.
The more optimistic possibility is that eventually people do gain the technical skills necessary and that they all can participate in the work force. Since not all the workers are needed on a full-time work basis, it follows that our society, and by extension our civilization, transforms to a work schedule of four or eventually just three days a week. Thus, with adequate food, goods and leisure time, civilization flowers in new directions.
Such trends will take time to develop and confirm themselves to statistical appraisal only over decades – but this trend and its destination is inescapable. There seems be much resistance by entrenched industries, labor and government in a desire to maintain the status quo, rather than view and facilitate this change as unavoidable and even desirable, and to make this long transition less painful. Policies by government, politicians, and the Federal Reserve Bank, such as increasing the minimum wage and keeping interest rates at record lows will do nothing to improve unemployment or the worker participation rate. Indeed, these policies seem to be targeted to some different issues or problems than those to which they are publicly committed. Technology is driving the reduction in the number of workers needed in agriculture, manufacturing and services. Contributing factors include corporate goals for improvements in efficiencies and profits, record consumer debt that precludes additional consumer spending, and demographic changes which influence spending patterns. These economic and social problems will in time resolve along predictable technological and demographic trends, despite efforts of central planners. To quote a famous line from the TV series Star Trek, as alien Borgs confronted others - “resistance is futile”.
Raymond Matison
Mr. Matison is a U.S. patriot who immigrated to this country in 1949. With a B.S. in engineering physics, an M.S. in Actuarial Science, work in the actuarial field, and as a financial analyst at Legg, Mason Inc., Lehman Brothers, and investment banking at Kidder Peabody, and Merrill Lynch provides a diverse background for experience. First-hand exposure to fascism, socialism, and communism as well as the completion of a U.S. Army military intelligence course in the 1960’s, have inspired a continuing interest in selected topics in science, military, and economics.
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