Were the Luddites right about technology and jobs?

Titan, a robot created by Cyberstein Robots Ltd., performs during a promotional event at the Qwartz shopping centre in Villeneuve-la-Garenne, near Paris Image copyright Reuters
Image caption It is predicted that robots could take over many jobs

This week, the Bank of England's Chief Economist Andy Haldane spoke at the Trades Union Congress on the outlook for the British labour market.

The headlines have been seized by his warning that up to 15 million UK jobs could be replaced by robots, but the focus on that (admittedly very large) number, risks missing some of the nuance of a, typically, thought-provoking speech.

It is certainly not every day that a senior economic policy maker can be heard publically wondering if maybe the Luddites "had a point after all".

He argued, correctly, that over the very long-term the level of technological change is probably the most important factor affecting the jobs market.

The story of human economic development is the story of ever increasing labour-saving technology and ever rising productivity.

Who were the Luddites?

An organised band of English mechanics and their friends, who set themselves to destroy manufacturing machinery in the Midlands and north of England between 1811 and 1816.

The term has come to mean one who opposes the introduction of new technology, especially into a place of work.

Read more about the Luddites

Since around 1750, productivity has grown by an average of 1.1% per year - a pace that means it improves by around a third with each generation.

Each wave of new labour-saving technology has been met with public anxiety on the impact on jobs and in the long run, each round of worry has proved to be misplaced.

Two effects

In terms of economic theory, labour-saving technology has two impacts: a displacement effect and compensation effect.

By definition, labour-saving technology (whether the Spinning Jenny of the 1760s, the industrial robots of the later 20th century or the automated check-out of modern shops) means less labour is required to produce a given level of output.

That is the displacement effect, the way in which new technology "destroys jobs" or, more neutrally put "displaces labour".

Image copyright Bank of England
Image caption Andy Haldane wondered if the Luddites were right all along

But as labour is displaced, workers become more productive (if the same amount of output is being produced with fewer workers) and that rising productivity means higher wages and more economic demand.

That rising demand can create new markets for new goods and services and ultimately new jobs. That is the compensation effect.

In the longer run, the story of the labour market and technology is the story of the compensation effect trumping the displacement effect.

In each round of technological change, jobs have been lost but ultimately new jobs have been created.

That might be a reason to not lose sleep about the robots taking 15 million jobs.

That would be the conventional economic answer anyway, but Haldane thinks the Luddites might - 200 years later - have had a point.

By zooming in on periods of intensive technological change and looking at what happened to jobs and wages in particular industries, Haldane has argued that the adjustment process is rarely smooth.

Engels' Pause

Take the early to mid-19th century for example.

As technology and productivity took off, it was more than a generation before real wages followed.

Image copyright Getty Images
Image caption Friedrich Engels first described a disconnect between wages and productivity

Economics historians have called this real wage stagnation Engels' pause after Friedrich Engels, who chronicled the flatline in wages.

When he co-wrote the Communist Manifesto 1848, Engels had observed a multi-year disconnect between wages and productivity - a period in which (in theoretical terms) the displacement effect was trumping the compensation effect.

Just as the Manifesto was published, real wages finally began rising.

At the dawn of what is being called the "Second Machine Age", it isn't inconceivable that something similar could happen - that displacement could trump compensation and the introduction of more labour-saving technology could suppress wages and hold down employment.

In the long run that might be reversed but then again, as celebrated economist John Maynard Keynes said: "In the long run we're all dead."

All which might seem like an interesting topic for a seminar room, but one with little practical application to monetary policy, especially at a time when UK employment is at a seven-year high and productivity growth has been exceptionally weak.

Haldane's speech was entitled "Labour's share" and it is the labour share - the percentage of national income swallowed up by wages - that makes this relevant to interest rates.

The labour share in the UK - and across developed countries - has been falling since the 1970s.

There is an active debate as to what has driven that but one factor - which Haldane has highlighted - is technology.

The Bank of England's forecasts suggest that inflation will gradually rise from around 0% currently to its target of 2% in the coming two years.

For that to happen though, they are forecasting that a tighter jobs market will push the growth of real wages above the growth of productivity which in turn will generate domestic cost pressures and help push inflation upwards.

To put it another way, the Bank of England is forecasting that the labour share of national income will rise moderately.

And it needs that rise to happen to hit its inflation targets.

Will a robot take your job?

Try our calculator to see if your job is at risk of automation

Haldane - the most dovish member of the Monetary Policy Committee - sounds less convinced.

He wonders if technological change could suppress wage growth by holding down the labour share and keeping inflation lower than where the Bank wants it to be.

What next?

But - as I have written rather too often recently - there is another factor at play: demography.

The working age share of the UK population is falling and the global over-supply of labour driven by the entry of China into the world economy looks to be ending.

Image copyright Thinkstock
Image caption The working age share of the population is falling

It is certainly possible that shifting demographics could put upwards pressure on the labour share (if there are comparatively fewer workers they can charge more for their services) just as it is possible that labour-saving technology could put downward pressure on the share.

It is the interaction of these two global trends - demographics and technology - that will help determine the ultimate bargaining power of labour just as much as the more familiar considerations of national policy.

Policymakers, both in central banks and in governments across the West, could be facing a headwind and tailwind as they try to navigate a future path on wages and inflation and sailing in those conditions will be very tricky.

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