Are Robots really taking our jobs and how can jobs be recovered/re-created? As the fallen price of technology has made investment cheaper, companies are using computers and automation tools to replace staff. This has led to a rise in profits relative to wages against GDP.
According to a study by Chicago Booth business school researchers Loukas Karabarbounis and Brent Neiman (and others) the most profound impact on wages and jobs losses is likely to be the rise of information technology investment by corporations and greater automation through Internet and software technologies and robotics on the factory floors, the investments in which gathered pace in the 1980s as depicted in a series of papers (Oliner and Sichel (2000, 2002), Jorgenson and Stiroh (2000), Stiroh (2002), and Jorgenson, Ho, and Stiroh (2002)). In a 2007 paper, a team of economists led by Harvard’s Dale Jorgenson found the economic expansion was driven by efficiency increases in the production of IT, including computers, software and telecommunications components. Improvements in IT production “resulted in higher rates of decline in IT prices, stimulating decisions by firms, households, and governments to invest in IT equipment and software.”
It would seem that there is solid evidence that during the period of the Great Stagnation where the global economy is said to have been stagnant, corporate revenues and profits have risen so dramatically, and as the above study shows, much of that can be attributed to improved efficiencies due to investments in automation. Of course globalization and migration of jobs also has an impact but by far the automation tools so heavily invested in over the 1990’s and early 2000’s are leading to increased profits versus GDP.
Chart 1 shows the record profits of US corporations, in fact since 2009, for instance, the majority of companies of the Standard and Poor’s 500-stock index have doubled their profits.
But, despite these profit and revenue growth at least one finding indicates that corporate investment is low or in ‘the trough’ as depicted in Chart 2, courtesy of Cardiff Garcia – US Net Business Investment.
I’m less convinced about the low level of corporate investment to GDP as much of software investment is treated as intangible assets and therefore not included in the above chart. US enterprise software revenue grew by 6% year over year in 2012 to circa $165 billion, and 5.6% in 2011 according to IDC. Further, of the 500 companies on the S&P index less than 50% include R&D spending in their annual reports whereas a company like the Euro 90 billion AXA group show significant investment in software and digital technologies, and almost 7,000 staff in their technology solutions division, but in respect to R&D spend they indicate ‘not applicable’ in their latest annual report. Additionally private companies tend to spend 6.8 per cent of total revenue versus just 3.7 per cent average for public companies according to a study by Joan Farre-Mensa and colleagues at Harvard and New York University.
My own belief is that corporate investments are rising and probably nearer 3% of GDP, whilst still low in comparison to 15 years ago the trend is up. This is indicated, in one ‘small’ example, by the 18 to 25 per cent growth in orders to robotic manufacturers and the growth in sales revenue by enterprise software companies, plus several additional factors listed above.
Sadly for employees, the growing investment in technology is reflected by a falling share of GDP for wages; which in turn contributes to rising inequality (Chart 3).
Much of this can be attributed to the fact that mid-wage jobs (sales, airport personnel, travel agents, bank employees, etc.) are not recovering whereas low-wage jobs have (Chart 4).
By one measure, real GDP has continued to increase as corporate investment grows and profits excel, despite 2 million less jobs:
Another illustration of technology investments increasing productivity, whilst the number of employees declines comes from the Federal Reserve Bank of St. Louis.
On reflection: profit growth will not be sustainable without revenue growth and revenue growth is not sustainable without investments, and investments create jobs right? According to a Reuters Thomson study the top 100 innovative companies in the S&P 500 spent $223 billion on R&D, and added more than 266,000 jobs. On the other hand without growth in earnings and pending interest rate increases people will have less to spend creating a downward spiral.
I remain confident that automation and robotics will serve to re-ignite the global economy – those profits have to be invested somewhere, even, as Apple has done in returning a significant amount to shareholders the money will have to be re-invested somewhere – the smart money is on improving processes and automated technologies and the companies that benefit from them. Technology companies will have a major impact on the economy in the next decade.