Tag Archives: technology

Minimum wages and robots

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This morning I read a good article in The New Republic about the Silicon Valley jobs market and the exercise of power in the labour market. It describes documents showing that the tech giants in 2005 colluded to keep wage rates down. This was news to me and seems pretty scandalous.

The article goes on to discuss in general why labour markets are not like goods markets, although most economics courses, and many grown-up economists, often speak as if they are. The fact that searching for a job is costly gives all employers a bit (or a lot) of monopsony power (or buyer power). And the prevalence of monopsony power needs to be taken into account in analysing the effect of an increase in the minimum wage: it will slightly decrease the employers’ power and reduce both job turnover and vacancies in low-wage jobs. There is some evidence to support this. The article also cites Alan Manning’s excellent book on this subject, [amazon_link id=”0691123284″ target=”_blank” ]Monopsony in Motion[/amazon_link].

[amazon_image id=”0691123284″ link=”true” target=”_blank” size=”medium” ]Monopsony in Motion: Imperfect Competition in Labor Markets[/amazon_image]

The US and UK minimum wages are middling by OECD standards (this chart from the OECD database deflates the statutory minimum by the national CPI and uses PPP for private consumption exchange rates to convert to US dollars). There is no obvious correlation with unemployment rates at this headline level.

OECD real hourly minimum wages

Labour market economics is one of the areas of the subject where economics most needs input from the other social sciences. Jobs and pay can’t really be understood without thinking about factors such as institutions, power, psychology and social norms. Never forget this when next reading about the way technology means inequality is inevitable.

Would Keynes see Fox News as progress?

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The economics profession has a less than stellar reputation for its forecasting ability, so asking some economists to make predictions for a hundred years from now is a bold move. Yet that’s what Ignacio Palacios-Huerta did for[amazon_link id=”0262026910″ target=”_blank” ] In 100 Years: Leading Economists Predict the Future.[/amazon_link]

One of the inspirations that led him to invite mainly US-based, highly eminent economists such as Daron Acemoglu, Robert Shiller and Robert Solow to think so far ahead was the famous 1930 Keynes Essay, [amazon_link id=”B00HRDZL5C” target=”_blank” ]Economic Possibilities for our Grandchildren[/amazon_link], and it is a starting point for several of the contributions. So, not surprisingly, a common theme is the likelihood of continuing technology-driven improvements in living standards, health and longevity in the long term – despite the clear short-term challenges. But another common theme to many of the essays is one not on Keynes’s horizon, namely the unknown but potentially catastrophic risks posed by climate change. I think many people who dismiss economics as not taking environmental issues seriously might be surprised about how many of these contributors address the question.

Overall, the tone of the essays is generally positive – Andreu Mas-Collel argues that economics should be called, not the ‘dismal science’ but the ‘cautiously optimistic science’. However, none of the economists ignores the reasons for pessimism. Apart from climate change and environmental pressures, they differ more in their pessimism than in their optimism. Daron Acemoglu focuses on ‘counter-Enlightenment’ fundamentalisms or other anti-modernist movements as a political force that will run counter to continuing progress.

In the most interesting essay in the book Ed Glaeser – an economist who has always worked creatively in the areas where economics borders the other social sciences – raises the possibility of social fragmentation in what he calls the ‘self-protection’ society. In addition to the fragilities that come with global interconnectedness – pandemics, terrorism and so on – he writes: “One recurring fear is that this prosperity will produce a self-protective society, more interested in keeping what it has than in creating change. Human kind has become wealthier precisely because we have taken risks.”

He also in this essay brings us the eye-opening fact that on average Americans spend almost as much time watching TV (2.83 hours a day) as working (3.2 hours a day) – as he comments wryly: “It seems quite possible that the recent technological change that has created the most benefit is the proliferation of cable channels.” Whether this is progress or not is another question. What would Keynes have made of Fox News or HBO?

Eric Schmidt is wrong – the robots are not drinking champagne

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I’ve not yet read [amazon_link id=”1480577472″ target=”_blank” ]The Second Machine Age[/amazon_link] by Erik Brynjolfsson and Andrew McAfee but am eager to do so. This question of what technology is doing to jobs and living standards is the issue of the moment. It’s obviously tempting for people to reach for the extremes (The robots are eating our jobs! We wealth-creators are being unfairly attacked!), when the truth will be nuanced, as it always is. Of course some comment has been more thoughtful. Gavin Kelly of the Resolution Foundation wrote a measured survey of the debate (its balance belied by the headline The Robots are Coming!). This Wonkblog column (Will Robots Steal Our Jobs?) pushes back against the robo-phobia in a reasonable way by looking at the history of the first Industrial Revolution.

[amazon_image id=”1480577472″ link=”true” target=”_blank” size=”medium” ]The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies[/amazon_image]

What I do know is that Eric Schmidt is wrong. The Google chief presented this at Davos as “a race between computers and people”. On the contrary, it’s a battle between people and people. I see no robots drink champagne and nibbling canapes at the World Economic Forum. The technology creates the potential for great advances in living standards, almost always in the recent (past 250 years) past shared widely. The sharing is done by society, and the institutions that govern it.

One key institution is public education, so the masses have skills that complement technology rather than competing with it. Our education systems are struggling to adapt from the age of mass production to the modern industrial system. Another set of institutions consists of those that redistribute – collective bargaining, the welfare state since the mid-20th century, in need of reinventing. There is also the question of the ownership of the machines. The invention of the joint stock company is often overlooked as an important mechanism not only for raising capital but for sharing ownership among the growing middle class. There’s a very good book about the co-evolution of institutions and technology during the Industrial Revolution, [amazon_link id=”0226014746″ target=”_blank” ]The Institutional Revolution[/amazon_link], by Douglas Allen – well worth a read for those pondering what institutions might stop the triumph of the robots, or rather their gilded owners.

[amazon_image id=”0226014746″ link=”true” target=”_blank” size=”medium” ]Institutional Revolution: Measurement and the Economic Emergence of the Modern World (Markets and Governments in Economic History)[/amazon_image]

Science fiction economics

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Gavin Kelly of the Resolution Foundation has written a very informative and balanced article in today’s Observer about technology and jobs – it’s more balanced than the headline (“The Robots Are Coming!”). He discusses the gloom about the hollowing out of good, ordinary, middle income jobs as featured in Tyler Cowen’s fascinating [amazon_link id=”0525953736″ target=”_blank” ]Average is Over[/amazon_link] and the forthcoming [amazon_link id=”0393239357″ target=”_blank” ]The Second Machine Age[/amazon_link] by Erik Brynjolfsson and Andrew McAfee; but also some of the reasons for not assuming we’re heading straight for the dystopia of a society divided between a minority of highly skilled, high earners and a lumpenproletariat earning minimum wage for service sector jobs the machines can’t quite do yet.

[amazon_image id=”0393239357″ link=”true” target=”_blank” size=”medium” ]The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies[/amazon_image]

I’m in the latter camp, although not at all sanguine about the social and institutional adjustments that will need to be made as we glide into the Age of Robots. These adjustments are everything: technology drives prosperity and progress (old fashioned idea, I know), but society determines how the benefits are shared.

In the article Alan Manning (author of a book with one of the best titles ever, [amazon_link id=”0691123284″ target=”_blank” ]Monopsony in Motion[/amazon_link]) refers to ‘science fiction economics’, a marvellous concept. [amazon_link id=”1857988124″ target=”_blank” ]Blade Runner[/amazon_link] is the obvious reference for the robots-are-coming thesis, but Bruce Sterling’s [amazon_link id=”0441374239″ target=”_blank” ]Islands in the Net[/amazon_link] leapt to my mind as the best example. Some of William Gibson’s recent novels, of course, such as [amazon_link id=”0399149864″ target=”_blank” ]Pattern Recognition[/amazon_link].

Any other suggestions for the best economic analysis through the medium of science fiction?

[amazon_image id=”0441374239″ link=”true” target=”_blank” size=”medium” ]Islands in the Net[/amazon_image]

How to create a blockbuster

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Anita Elberse’s [amazon_link id=”0571309224″ target=”_blank” ]Blockbusters: Why Big Hits and Big Risks are the Future of the Entertainment Business[/amazon_link] is published in the UK in January (it was out in the US earlier in 2013). It’s a clear and well-written series of case studies in how various branches of the entertainment business – movies, pop music, TV shows, books, sport – rely on a ‘blockbuster’ strategy as a business model.

[amazon_image id=”0571309224″ link=”true” target=”_blank” size=”medium” ]Blockbusters: Why Big Hits – and Big Risks – are the Future of the Entertainment Business[/amazon_image]

The economic analysis underlying the argument is not new. It can be traced back to Sherwin Rosen’s 1981 paper on the Economics of Superstars. I wrote about the way digital technologies were amplifying the superstar effect in my 1996 book, The Weightless World (pdf). However, Blockbusters provides plenty of examples of how the analysis translates to the real world. There are many interesting case studies in the book, albeit all American. Elberse also shows very convincingly how the blockbuster business model stacks up, based on her research experience talking to many of the firms she describes – she cites the revenue and cost data for specific movie releases, for example. A Harvard Business School professor, she clearly has terrific experience across a range of entertainment industries, and the details are fascinating. If you can afford to market a new release or title at scale, you’d be an idiot not too.

This means the [amazon_link id=”184413850X” target=”_blank” ]Long Tail[/amazon_link] idea is largely wishful thinking. The profit margins from the handful of blockbusters might support the production of a long tail but it isn’t even the case that there will always be a long tail because producers don’t know which will become hits. For although there is indeed great risk involved in releasing a possible blockbuster, few films or books or albums become blockbusters without a deliberate marketing effort. And scale in marketing is almost always decisive; the book cites a few grassroots successes, such as Lady Gaga’s first album, but they are obviously exceptional. So this means there is little prospect of Hollywood moving away from the model of putting resource including marketing into successful franchises, and most of what will be on offer will be of the same ilk as Harry Potter I to VII, The Hunger Games I to N, etc. Celebrities will only grow larger and more monstrous.

The book ends on the suggestion that the blockbuster strategy is going to have to be adopted by a growing range of businesses. Elberse gives the examples of Apple and Victoria’s Secret for their successful deployment of spectacle around a few products. “Apple releases fewer products and product variations than virtually all its competitors in computer hardware,” she writes. It makes just a few bets, in both production and marketing, in contrast to its competitors.

If I were an executive in any of the entertainment businesses, I’d regard this book as a must-read and consider its lessons very seriously. As a citizen, and a non-American, I found it a bit depressing. As a non-American because the US economic advantage of the scale of the domestic market is becoming even more pronounced than ever; the benefits of that scale are often overlooked anyway. They are even greater in digital markets where fixed costs (including or especially marketing) are high, and marginal cost is low to zero. As a citizen because –  although it would be overstating things to say everything is becoming Hollywoodised and dominated by celebrity – there is something in this.

It is obviously possible to declare independence from popular US-originated or US-inflected celebrity culture, and graze around the vast steppes of the internet for other cultural products. Other countries do succeed in different ways in supporting their own culture. There are different kinds of celebrity – Professor Brian Cox as well as Lady Gaga. Still, it seems it will have to be an increasingly active decision to opt out of Celeb-land. [amazon_link id=”0099518473″ target=”_blank” ]Brave New World[/amazon_link]?