10 Innovation and Labor Market
Jessie Martinez
Economic Labor Theory predicts that the value of a worker is based on their Marginal Revenue Product (MRP) which is determined by the worker’s productivity and the value of the output they are producing. The simple rule is that employers will hire if the MRP is greater than the cost to employ them (i.e. the wage). We know that technology can be complementary to labor increasing productivity which makes humans more productive. Thus, the reason a machinist using physical capital is paid $40 an hour to produce a part where someone else producing by hand is paid $5 a day. However, technology can also be a substitute and eliminate the need for humans. Think self-check outs eliminating the need for a cashier. As robotics and artificial intelligence (A.I.) become more sophisticated and less costly to produce, the concern is that it will become more economical to replace humans with robots throughout the economy. The result is that humans will have to be willing to work at lower wages to be competitive. Some in congress believe that this transition, while likely inevitable, can be managed with the institution of a robot tax. A business employing a robot in their production process would need to pay a tax for that choice. The robot tax would even the field a little bit increasing the cost of employing a robot thereby providing an incentive to instead hire a human at existing wage.
Historical Evidence
There have been four industrial revolutions that have significantly altered society. The first industrial revolution (1760-1840) transitioned from manual labor to machine based production, the second (1870-1914) brought electricity and combustion engine, the third (1969-2000) electronics, computers, and nuclear power, and finally the fourth (2000-today) Robotics and A.I.
Studies show during the first industrial revolution that Real GDP (output) per person increased 39% , however real wages grew more slowly.(Crafts) Wages initially declined during the early part of the industrial revolution (1760-1780) with most gains not apparent until latter stages (1830-1840).(Horn) Real wages declined as machines replaced human power (substitution) until new methods of production that leveraged human skills (complementary) or new human based outputs were created. While wages initially declined the increased productivity meant there were a plentiful supply of goods that were accessible. Goods that in the past would have been reserved for the rich like coffee, chocolate, and clothing (Horn). Families were willing to work more hours to gain access to these goods. In 1851 British census, 36 percent of children worked. The average Brit labored 50 hours a week in 1760 and 61 hours in 1850 (Horn). From 1760 to 1850, consumption increased 75%. Wages fell, but there were more items to purchase, so people were willing to work harder and longer to have access.
Not all sectors of the economy were impacted in the same manner. For example,