Is Technology A Barrier to Job Creation?

Here's a somber thought: We may never - or at least not anytime soon - regain "full employment," meaning an unemployment rate between, say, 4 percent and 5.5 percent. It is now four years from the recovery's start, and the number of jobs is still 2.2 million below the pre-recession peak. Since World War II, this has never happened. After the harsh 1981-82 recession, employment recouped lost ground in 12 months. Economists are searching for an explanation, and one recent candidate seems surprising: high tech.

It's usually seen as an engine of growth, but the spread of automated processes and robots has actually acted as a drag on job creation and has kept the unemployment rate high (7.6 percent in June), argue Erik Brynjolfsson and Andrew McAfee of the Massachusetts Institute of Technology. Digital technologies, they contend, have enabled companies to cut costs, increase productivity (i.e., efficiency), improve profits and slash payrolls. They expect more of the same.

"The MIT academics foresee dismal prospects for many types of jobs as these powerful new technologies are increasingly adopted not only in manufacturing, clerical and retail work but in professions such as law, financial services, education and medicine," wrote David Rotman in an informative story in the MIT Technology Review. A gap has opened between productivity increases and employment growth, goes the theory. If it persists, it would confound economic history.

Technological upheavals routinely disrupt. Airlines and interstate highways decimated railroad passenger service. Between 1945 and 1970, intercity rail travel dropped nearly 90 percent. Air conditioning drew people and plants from the Northeast and Midwest to the South. Early in the 20th century, supermarkets - a more efficient form of organizational technology - displaced small grocers. "While selling food cheaply was good for consumers, it was bad for the hundreds of thousands of retailers, wholesalers and manufacturers who needed high food prices in order to make a living," wrote Marc Levinson in his book "The Great A&P and the Struggle for Small Business in America."

But these and other large technological shifts - from steam power to electrification - typically haven't spawned the permanent rise in unemployment feared by Brynjolfsson and McAfee, says Harvard economist Lawrence Katz. Some existing workers lost their jobs; it was hard on them. Yet there were always "new sources of labor demand" that prevented a steep rise in unemployment.

This is the crux of the matter. Productivity-enhancing technologies usually create more demand than they destroy, through two channels. First, lower prices enable consumers to buy more. If grocery costs fall, shoppers can purchase more food - or something else entirely. Lower computer chip prices have spawned mass markets for personal computers, cellphones and tablets.

The second channel is higher wages and profits. Some efficiency gains go to workers, managers and investors. Their greater purchasing power then raises total demand and living standards. Over the past half-century, higher productivity in manufacturing and agriculture has enabled Americans to spend more on health care and education. If history repeats itself, fears about the digital revolution (like earlier fears of other technologies) will fade.

There's the rub: Will history repeat itself?

It's a stretch to see digital technologies as a major source of today's unemployment. In the recession, the economy lost 8.7 million jobs. Most were non-digital, concentrated in construction, finance, retailing and manufacturing. What seems less dubious is that, in a permanently sluggish economy, firms might favor digital investments that shave costs and sustain profits. McAfee envisions warehouses maintained by robots, trucks driven by computers and automated language translations. The digital revolution could stymie job growth.

Unfortunately, the Great Recession abetted this protective psychology. This keeps unemployment up. Companies didn't just fire workers; they also went on a hiring strike. "In the Great Recession, [hiring] took a bigger hit than in any previous recession - and has not recovered," economist John Haltiwanger of the University of Maryland recently told a conference of the National Bureau of Economic Research. In other post-1980 recessions, he said, less hiring accounted for about 20 percent of the job loss; in the Great Recession, the share was roughly 60 percent.

Haltiwanger sees the economy becoming less dynamic. Young firms less than five years old create a huge number of new jobs, but the rate of business start-ups has declined - and with it, new jobs. In the late 1980s, start-ups' share of net job creation was nearly half; now, it's just below 40 percent. The causes of the slump in start-up firms are unclear. Some candidates: an aging society, government regulations, more risk-aversion.

The recent pickup in hiring to 200,000 a month, about 10 percent higher than 2012's rate, is encouraging. But it's still a long way to "full employment." Projections have us getting there in 2017 or 2018, assuming faster economic growth and no recession. Let's hope that's not wishful thinking.