Jul 9, 2017

Data reveal: how automation is suppressing wages

It's the great economic conundrum of our day: if the unemployment rate is so low, why aren't wages growing faster? The law of supply and demand tells us that as labor gets scarce, wages should rise. Yet, as we saw in the latest jobs figures on Friday, average U.S. hourly earnings have barely exceeded inflation for three years running.

What's going on? The answer may lie in the Wage Growth Tracker (below), an alternative gauge produced by the Federal Reserve's Atlanta bank. It substantiates what a lot of people have suspected: that older, higher-paid workers are leaving the workforce and being replaced with cheaper, younger workers who hold little bargaining strength when they can be quickly replaced by automation.

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Data: Federal Reserve Bank of Atlanta; Chart: Lazaro Gamio / Axios

A level deeper: Automation technology has held down the wages of lower skilled workers for more than four decades, by giving employers a fallback option when labor gets too expensive. Recent employment growth has been bringing these workers back to the labor market, but their power to negotiate higher wages remains weak.

An enduring headwind: BMO economist Sal Guatieri theorizes that the growing number of applications for automation will keep wage growth low for the foreseeable future. "New automation is working its way up and down the skills chain, threatening a wider range of jobs than in the past, including many non-routine positions," he writes.

Be smart: The upside of automation is that it should increase the productivity of the workforce, which has historically been a necessary (although not always sufficient) condition for wage growth. But some leading economists say this relationship has broken down, and that we shouldn't be surprised if shareholders reap future gains of higher productivity while leaving workers no better off.

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