US Economy
Big US companies are no longer big employers
By Finfacts Team
Apr 17, 2013 - 7:37 AM

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Big US companies are no longer big employers. For example, General Motors had over 618,000 employed in the US in 1979 - - in well-paid jobs; today, General Electric employs 133,000 and Apple 47,000. The US needs to add about 90,000 new jobs monthly to just meet the natural growth of the workforce. General Motors' worldwide employment in 1979 was 853,000. Today it is about 202,000 with 80,000 employed in the US.

At a recent forum in San Francisco, Erik Brynjolfsson, a professor at MIT's Sloan School of Management and director of the MIT (Massachusetts) Center for Digital Business said: "Technology doesn't automatically lift the fortunes of all people. It's something of a paradox. Profits have never been higher, innovation is roaring along, GDP is high, but job creation is lagging terribly, and the share of profits going to labour is at a 60-year low. This is one of the most important issues facing our society."

Citing the work of economist Joseph Schumpeter (1883-1950), the Austrian -born economist, Brynjolfsson noted that technology has historically provided "creative destruction" for an economy, causing some jobs to disappear while bringing others into existence. "But the last 10 years have been different. Technology simply hasn't been creating jobs as it did before."

It's a double-barreled effect, Brynjolfsson added. Not only are today's technology companies creating fewer jobs, but the products they make, notably computerized automation equipment, often lead to further job losses in other parts of the economy. These second-effect job losses are further encouraged by off-shoring and by the declining power of labour unions.

Enrico Moretti, an economics professor at the University of California, Berkeley, said that the average tech position creates five additional jobs in various support industries, from doctors to hairdressers to dog walkers. However, the "multiplier effect" for manufacturing jobs is much lower: 1.6 instead of 5. Much of that, he added, was simply the result of the higher wages generally paid by tech jobs.

Last year at the Aspen Ideas Festival, Alan Krueger, chairman of the White House Council of Economic Advisers, stressed the challenge of adding jobs in the economy:

"If you look at the decade before the recession, the US economy was not creating enough jobs, particularly not enough middle class jobs, and we were losing manufacturing jobs at an alarming rate even before the recession. And I would also put together, combined with those two problems, the polarization of the US job market, the fact that we are getting more and more people at the very top and the very bottom and the middle has been shrinking."

On his blog, Andrew McAfee, an MIT colleague of Erik Brynjolfsson, explains the graphic above:

"Since the Great Recession officially ended in June of 2009 GDP, equipment investment, and total corporate profits have rebounded, and are now at their all-time highs. The employment ratio, meanwhile, has only shrunk and is now at its lowest level since the early 1980s when women had not yet entered the workforce in significant numbers. So current labor force woes are not because the economy isn’t growing, and they’re not because companies aren’t making money or spending money on equipment. They’re because these trends have become increasingly decoupled from hiring — from needing more human workers. As computers race ahead, acquiring more and more skills in pattern matching, communication, perception, and so on, I expect that this decoupling will continue, and maybe even accelerate."

In a videotaped interview on Bloomberg News, Brynjolfsson was more cautious:

"I have to be brutally honest, I don’t think Andy and I are sure whether it’s different this time around. If you look at the data, this time it seems to be a lot more difficult. So it’s possible we are facing a regime change, a fundamental change in the way technology and employment interact with each other."

McAfee and Brynjolfsson have authored a book 'Race against the machine' and the Economist's Free Exchange blog commented:

"The first thing to understand about ICT is that it is a general purpose technology, like electricity, with the ability to dramatically change business models and boost productivity across many different sectors. The second critical detail is the deceptively rapid pace of technological change. The authors note that when technologies improve in a Moore's Law-like fashion, doubling in power at relatively high frequencies, the huge scale of potential change sneaks up on you. The first few doublings—1 to 2, 16 to 32—seem unremarkable. By the 50th doubling, when you're going from 563 trillion to 1.1 quadrillion, the pace of progress seems almost magical. In this way, developments that seemed impossible a few years ago, like fully autonomous cars and high-quality computerized translation, are now realities, or soon will be. And there's good reason to think that ICT is just getting warmed up."

James Hamilton, an economist at the University of California, San Diego, challenged the 'Race Against The Machine' thesis and told The New York Times:

"I am very skeptical of the claim that technology itself is the problem. In 2005, the average US worker could produce what would have required 2 people to do in 1970, what would have required 4 people in 1940, and would have required 6 people in 1910. The result of this technological progress was not higher unemployment, but instead rising real wages. The evidence from the last two centuries is unambiguous — productivity gains lead to more wealth, not poverty. The unemployment since 2007 was not caused by gains in productivity or increased automation, but instead by loss of demand for the product that the workers had been producing, for example, a plunge in the demand for new home construction."

Brynjolfsson and McAfee outline a list of 19 proposals that they support — which range from massive investment in education, infrastructure and basic research, to lowering barriers to business creation, eliminating the mortgage interest deduction and changing copyright and patent law to encourage new (as opposed to protecting old) innovations.

Any effort to counter the damaging consequences to the employment marketplace stemming from technological innovation, according to Brynjolfsson, requires substantial government action at a time when “the political system is the most dysfunctional part of our society.”

Book Excerpts in The Atlantic:

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