Income and robots: the economics of partying too hard

Eric Lonergan   14/06/2017   Comments Off on Income and robots: the economics of partying too hard

The recent shifts in political ideology around the world have been fought against a background of increased tensions over wage levels and a fear of job insecurity in the wake of both globalisation, and more recently, technological advances. These issues underpin much of the political discussion in the UK, where concerns about inequality gained just as much prominence as Brexit negotiations.

However, many of these debates focus simply on the numbers and relative shifts (see figure one, for the UK experience of the last ten years) with far fewer questions being asked about the nature of employment and how wages are determined. How we think about these issues can have important implications for how economists and investors approach policy and the interpretation of macro data.

Work, Leisure, and Employment

What is the difference between work and leisure? A distinction based on paid and unpaid activities is incomplete. A better distinction is between activities we want do and those we don’t enjoy. But this is also inadequate. Childcare can be something we want to do, it can be hard work, and also paid employment. Apparently, you can even party too much.

Many activities fall into the same category as childcare. Classifying a given activity as work or leisure may not succeed because it often depends on who benefits – your children, or someone else’s – and how many hours of work are required. Diminishing marginal utility turns many activities from a pleasure to a chore.

It follows from this that work is not the same as employment, which is clearly defined as a paid activity, usually carrying contractual obligations. Formal employment – having a job – usually encompasses sets of activities. Leisure may be even harder to define – if it is simply things we do voluntarily, without being paid, it encompasses lots of activities we would describe as work, and given the choice, we wouldn’t do.

Wages are not like other prices

There are important implications from these very simple observations. It bears on the economics of the labour market, and the debate about robots. The basic microeconomics of labour markets is relatively precise but reflects these analytical limitations. It assumes that there are two distinct sets of activities, those we ‘want’ to do, and those we don’t want to do. It assumes they are separable. Wages are an inducement to do things we don’t want to do.

There are huge problems with this framing of the problem, some of which are very well rehearsed. Much of the work in this area has tried to explain why wages are unlike other ‘prices’, and in particular the resistance to nominal declines. A classic example would be the efficiency wage literature which recognises that wage levels can motivate.[1]

The obvious objection to the standard micro-model is that most people want to work. Human motivation is not as simple as saying ‘I want to do this activity because it will give me money’. Work carries status, can give people stability, allows people to plan – or not. Many jobs combine satisfying aspects with unpleasant tasks. People’s happiness at work can fluctuate for lots of reasons unrelated to wages, often to do with their colleagues. To the firm, wages may be prices, but in a fundamental sense, they are not to the recipients. Microeconomics also usually assumes a continuous option to substitute hours worked for hours of leisure. But employment is not like this. It is embedded – organisationally and administratively – in our lives. People plan on the basis of their income, they acquire liabilities. Firms fix contracts, or make them flexible, often they don’t really employ on a per-hour basis.

For these reasons, I have argued before that labour supply curves can have perverse shapes, and in certain circumstances declining nominal wages can increase the supply of labour. Keynes was absolutely right: lack of nominal wage flexibility is usually not the cause of cyclical unemployment.

Unpaid activities that people don’t enjoy also get done. Standard economics can’t explain this. Of course, if you define ‘want’ via revealed preference – we ‘want’ to do everything we do. This is either tautology or wrong. We have to do lots things we don’t want to do – life comes with sets of tasks, not with divisible ‘work’ and ‘leisure’.

The role of ‘robots’

How might all this bear on the robot debate? Particularly, ‘Robot’ is really just shorthand for continued technological progress. The simple point remains that in advanced economies there is more technology deployed than at any other point in human history and simultaneously the number of hours worked (in paid employment) is also the highest in history. Far from there being a correlation between degree of technological advancement and unemployment, the opposite seems more accurate: developed economies with high rates of diffusion seem to have very low unemployment. This is a hard relationship to measure, but consider the following chart from a 2011 paper by Georg Duernecker:

Duernecker’s paper should be taken with a pinch of salt. It uses pre-crisis data and many statistical assumptions, while all the problems of both correlation/causation and cross country comparisons will be in play. However, on a more simple level, consider this ranking of countries by unemployment rates. Singapore is the developed country with the lowest rate of unemployment, Spain has the highest. At best, higher technological diffusion reduces unemployment, at worst, it is irrelevant, and other factors – cyclical demand-management or labour market structure – are dominant.

So the robot debate must be reframed. Think of all the things you have to do, either in paid employment or in unpaid life, which you don’t enjoy doing. Let’s make sure we give those tasks to the robots.

What if robots start doing the things we enjoy? The evidence so far is that we love them as partners in games. They are also expanding the scope of our social lives, although the effects are mixed. Perhaps AI is the real threat, if computers either prove that our cherished beliefs are nonsense, or if they start doing all the thinking for us. There again, to paraphrase Thomas Edison, people will go to great lengths to avoid thought.

[1]The classic empirical work on the complexity of wage setting is Why wages don’t fall in recessions by Truman Bewley.


About the author, Eric Lonergan

Eric Lonergan joined M&G in 2006 as a member of Dave Fishwick's multi asset team. Eric is currently manager of the M&G Episode Defensive Fund, launched in September 2012, as well as co-manager of the M&G Episode Macro Fund, launched in 2010. Prior to joining M&G, Eric was managing director and head of macro research at JP Morgan Cazenove. He has a BA in politics, philosophy and economics from Pembroke College, Oxford, and an MSc in economics from the London School of Economics.