I’ve been traveling a good deal so far this year, and mild disorientation is an occupational hazard. But I had a moment of high confusion during a recent visit to California. On a walk to the grocery to nab a late dinner, I saw an automobile go slowly by with no one in the driver’s seat. For those wondering, I had not been overserved on the airplane.

The next day, someone explained to me that computer-guided vehicles were being tested in the area. The technology has the potential to end the need for Uber drivers, who only recently began ending the need for taxicabs. The disruptors may soon be disrupted.

While amazed by the concept, I was concerned that one of those e-cars might suffer a software glitch and run into a wall. More broadly, the advance of technology often engenders a combination of amazement and anxiety. While historical evidence supports the benefits of innovation, the recent pace of change has some wondering whether this time is different.

Human beings have long had an uneasy relationship with machines. The Luddites broke into factories during the Industrial Revolution, seeking to destroy the steam-powered looms that put hand weavers out of work. The McCormick reaper reduced the need for farm hands, forcing scores to seek their fortunes in the city. Today, agricultural and manufacturing output is at record levels, but employment in these two sectors is a shadow of its former self.

chart 1


Happily, the worst fears about those technological changes were not realized. Total employment continued to expand, as new industries arose and flexible labor markets supported them. Compensation for workers that remained in manufacturing improved steadily until the forces of globalization were fully unleashed. While the substitution of capital for labor reduces employment in the affected sectors (and sometimes only temporarily), this has not been the case for an economy as a whole.

Further, the application of technology makes workers more productive, and therefore more valuable. And innovation improves standards of living even more by increasing choice and reducing prices. These benefits should not be overlooked.

Yet each wave of progress brings new insecurities. It’s very easy to identify the jobs and companies that might be lost during transitions, but much harder to identify the opportunities and organizations that will take their places.

note 1In recent decades, the seismic changes brought about by advanced computing have fostered a heightened level of unease. The threat of obsolescence is now being principally felt by service workers, who had thought themselves immune to being automated out of their jobs. The ranks of bank tellers and travel agents have been declining for years, but computers are now writing news articles and robots are administering some basic medical services.

We are seeing the potential of technological takeover in two other arenas. Merger and acquisition activity has been especially heavy of late, with the promise of computer-driven efficiencies justifying the economics of combinations. And the presence of digital alternatives may cap wage growth in some professions. For example, fast food establishments might accelerate consideration of tablet-driven ordering if labor costs escalate too quickly.

For many years, employment and productivity advanced virtually in lockstep with one another. This suggests that capital and labor weren’t necessarily in competition with one another. But the two have diverged a bit in the last 15 years, a period that corresponds with an accelerated penetration of computers in the workplace.

chart 2

With each new application, the potential for labor market dislocation rises. Low-skilled occupations are highly vulnerable; workers who have minimal education have seen their prospects diminished the most. Some descend from disenfranchised to discontented; the recent rise in protest parties around the world has been founded in part on the anger of those who feel doomed to the underclass. Taken to the extreme, this sentiment may be among the factors that incite young people to become militants.

Some countries have attempted to soften the blow by pursuing protectionist policies. Restrictive labor laws and business licensing, among other things, aim to preserve the status quo. But the forces of modernity are not to be stopped; ultimately, it is much better to embrace change than keep it from happening.

note 2The vistas ahead are very promising, and there is every reason to think that new positions will eventually sprout where old ones have receded. But it is dangerous to dismiss the anxiety felt by the vulnerable. Societies would do well to work harder at offering them a place in the new economic order, by helping with retraining and re-placement. Some of the discussion in the United States over making community college more accessible is one example of this. The role of individual industry in the process should not be diminished, but we might offer it a clearer path to express itself.

When I got back from California, I noticed an old Rand McNally map book cluttering the rear of my car. That tome used to be standard operating equipment for motorists. Today, we have little need for printed maps; and tomorrow, we may have little need for motorists. Balancing the anticipation and trepidation surrounding such evolutions will be a key economic challenge across the globe.

Job Creation Gets Back on Track
We’ve received a string of dispiriting numbers on the U.S. economy over the past few weeks. With the announcement of a very deep March trade deficit, it seems likely that gross domestic product (GDP) retreated in the first quarter. Anxiety about performance in the balance of the year has been rising.

In this context, the April employment report was a great relief. Nonfarm payrolls rose 223,000 last month, a big improvement over March. (Job gains for March were revised downward to just 85,000.) For the first quarter as a whole, payroll employment averaged 184,000 versus 324,000 in the fourth quarter of 2014, but this reflects a weather-related setback and a reduction in oil- and gas-related jobs. Given these temporary limitations, this is not a poor result.

In April, construction employment posted a robust 45,000 increase, while manufacturing hiring (+1,000) was soft. Oil- and gas-related employment fell 3,300 in April; total job losses in this sector, including support activities, was 14,900. Year-to-date, the mining sector (which includes the oil and gas industry) has lost 49,000 jobs, a significant correction that is not likely to continue at the same pace going forward.

The unemployment rate ticked down one notch to 5.4% in April, a seven-year low. A broader measure of unemployment, which includes discouraged and marginally attached workers, dropped a tenth to 10.8%. Part-time employment declined to a new cycle low and the share of long-term unemployment also fell. Taken together, measures of labor market underutilization are shrinking and the jobless rate is inching closer to the Fed’s estimate of the long-run rate (5.0% to 5.2%).

note 3The labor force participation rate, a closely watched indicator, rose one-tenth to 62.8% in April. As we’ve discussed in past commentaries, demographics have creating a declining trend for the participation rate as the post-war generation transitions into retirement. The fact that the participation rate has held essentially steady for almost two years suggests that discouraged workers are returning to the labor force, which is another sign that labor underutilization is shrinking.

WEC chart 3

Hourly earnings increased 0.1% in April, putting the year-to-year gain at 2.2%. This modest increase is lower than the 2.7% jump of wages in the first quarter Employment Cost Index. Taking the two together, compensation does seem to be facing a little more upward pressure, which one would expect at low levels of joblessness. Such a trend would help the Federal Reserve feel more confident in its quest for both maximum employment and 2% inflation.

When we analyzed last month’s employment report, we cautioned that one month does not make a trend. We are not going to stray from that advice just because the April outcome is more favorable. In the coming weeks, we’ll be watching for confirmation that the second quarter is heading in a strong direction.

The Federal Reserve will not act until that confirmation is clear. That makes an interest rate increase in June unlikely, but September remains a strong possibility.

Disability Insurance Rolls – Devil Is in the Details
One corner of the U.S. employment arena that has garnered attention over the past several years is the increase in workers collecting disability insurance (DI) payments. Some have posited that the long-term unemployed have been using disability insurance to extend expiring jobless benefits. But while there appears to be some correlation between DI beneficiaries and labor market health, researchers have found little causation between the two.

As background, DI is the part of Social Security that provides benefits to workers who cannot support themselves due to a long-lasting medical impairment. A rapid increase in the number of DI recipients in recent years has made headlines in the press. Of late, this trend has changed, which calls for a re-examination of the data and its implications.

In March 2015, about 8.93 million people in the United States received disabled-worker benefits, down from a peak of 8.95 million in September 2014. The number of new disability awards peaked in 2010 and held steady at around 90,000 a year during 2009 to 2012.

note 4One interpretation is that DI benefits are a way to extend unemployment insurance during an economic slump. Historically, there is a correlation between disability insurance and the jobless rate but these flows are small (see chart below).

chart 4

Research at The Center on Budget and Policy Priorities indicates that the increase in DI beneficiaries in recent years is largely due to demographic factors such as population growth, aging of baby-boomers and the increase in Social Security’s full retirement age from 65 to 66. Simply stated, older workers are more likely to suffer the sort of maladies that lead them to collect DI. In other words, the cyclical influence is not the major force that explains the increase in DI rolls.

This tends to undermine the position of those who feel that curtailing eligibility for DI will produce an important increase in labor force participation. The number of DI beneficiaries has declined by nearly 23,000 in the last six months. But in the context of the current U.S. labor force, which is roughly 157 million, this decline is unlikely to make a large dent.

Workers certainly respond to incentives, and so there may certainly be cases where insurance support provides a disincentive to work. But in aggregate, it does not appear that the presence of a medical safety net is detracting much from the overall health of the U.S. labor market.

 

(c) Northern Trust

www.northerntrust.com

 

© Northern Trust

Read more commentaries by Northern Trust