The Robot Rampage
Donald Trump tends to present the labor market as a zero-sum game: companies have shifted production to China and other emerging markets. He’s going to bring those jobs home.
Put aside for a moment how moving jobs back to a country with high costs gives companies an incentive to automate. There's a bigger problem: After displacing U.S. manufacturing workers, robots are poised to do the same in developing economies, too. It will be hard to re-shore jobs that no longer exist.
It took 50 years for the world to install the first million industrial robots. The next million will take only eight, according to Macquarie. Importantly, much of the recent growth happened outside the U.S., in particular in China, which has an aging population and where wages have risen.
In some respects that’s a good thing, of course. Working on a production line is monotonous, and sometimes dangerous.
However, building a large manufacturing sector has traditionally been the path emerging economies have taken to raise living standards. Now, robots and other types of automation are a threat to that development model. In November, the United Nations warned two-thirds of jobs in developing countries are at risk.
Even an America-first advocate like Trump should be concerned by this because people joining the middle classes in Vietnam, Mexico or Egypt will be potential customers for U.S. goods exporters.
Why might it happen? Back when the U.S. middle class flourished after World War II, factory automation was expensive. Robots were limited to only a few sectors -- mainly the auto industry -- and those automatons weren’t that sophisticated. Wages rose thanks to improved productivity, but workers weren’t completely made redundant by the machines. 1
Poorer countries in Asia or Africa probably won't be that lucky. Today's robots are far more capable, are being deployed in a wider range of industries, and are cheaper too. That leaves less room for wages to rise before humans are priced out of the labor market. More low-cost automation also means manufacturing can be re-shored to developed economies.
German robot maker Kuka AG, acquired last year by China’s Midea Group Co., estimates a typical industrial robot costs about 5 euros ($5.28) an hour. Manufacturers spend 50 euros an hour to employ someone in Germany and about 10 euros an hour in China.
That's brought forward the point at which companies can recoup their outlay on automation equipment: the payback period for an automotive welding robot in China has fallen to less than two years, according to Macquarie.
Rather than seek out an even cheaper source of labor elsewhere -- in another emerging Asian economy, say -- Chinese manufacturers are choosing to install more robots, especially for more complex tasks. As Bernstein analysts recently put it, China isn't getting rid of the work, just the workers.
That could be one reason manufacturing employment has already peaked in many emerging economies, and it’s been happening at a quite a low percentage of total employment and at an earlier stage of economic development -- a trend that has been dubbed "premature deindustrialization."
To be clear, this isn’t an argument against technology per se. Smartphones provide users with access to much of the world's knowledge and increasingly those phones are a ticket to a job in the services sector.
But it's an open question whether services jobs – like driving for Uber -- will be as well paid or secure as a job on a production line. There's also the risk those services jobs will become far more automated -- driverless cars are a threat to cab drivers.
Competition for good services jobs is likely to be fierce, keeping a lid on wages. Taken together, it's possible robots end up exacerbating inequality in low income countries.
Even business leaders who stand to profit from greater automation and digitization have become increasingly outspoken about the potential negative consequences. In Germany, the CEOs of Deutsche Telekom AG and Siemens AG have both recently backed some form of basic income for those displaced by technology. 2
Of course, Trump is unlikely to back anything that sounds like money-for-doing-nothing. Still, he’ll have to deal with the consequences: few manufacturing jobs are coming back to America and not many will be created elsewhere.
See Martin Ford's book "The Rise of the Robots"
Siemens later clarified chief executive Joe Kaeser's remarks to suggest any support shouldn’t be unconditional.
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