More Jobs, Less Pay

Here’s a thought experiment posed recently by Robert Gordon, an economics professor at Northwestern University. Imagine that you can have either a) all the wonderful technological inventions created since 2001, including Facebook, the iPhone and the iPad, or b) running water and indoor toilets. I’m betting even the most diehard geek will pick the latter, which may tell us something important about the nature of technology, economic growth and job creation in this country.

The latest unemployment figure of 7.8% is the best we’ve seen since 2009. Despite nutty conservative conspiracy theories of Bureau of Labor Statistics data manipulation, the gains are real. And they probably have something to do with the firepower that both the Obama Administration and the Fed have thrown at fixing the economy over the past few years. But the grim truth is that this number is still very, very high by historic standards.

And now for the bad news: while enough jobs are being created to bring unemployment down a few notches, wages are still totally stagnant. Most economists think unemployment has to fall below 7% to start seeing any wage growth at all, which is important when 70% of your economy is based on consumer spending. No raise, no spending. Sadly, the employment ratio–meaning the portion of the adult population that’s actually working–is now at its lowest level since the early 1980s, when women hadn’t fully entered the workforce.

Many politicians and economists argue that the solution is to innovate our way to growth by inventing more cool new technologies that will get people spending and companies hiring. But let’s face it: those technologies already exist. (Raise your hand, iPhone 5 owners.) Corporate profits are at record highs–the private sector is, in fact, doing just fine–and companies are buying plenty of cool new technology. The problem is that they are using it to replace human workers everywhere, with software eliminating white collar administrative jobs and robots getting Chinese factory gigs. “As computers race ahead, acquiring more and more skills in pattern matching, communication, perception and so on, I expect that this decoupling [of corporate-profits growth from hiring] will continue and maybe even accelerate,” said MIT scientist Andrew McAfee, a co-author of Race Against the Machine, a very influential book about this shift, in a recent blog post.

That’s an enormous change, since technology has historically been a net job creator. But as Northwestern’s Gordon recently explored in a paper with the foreboding title “Is U.S. Economic Growth Over?” the trend has slowed significantly over the past four decades. He believes the major life-changing benefits of technological innovation came from 1870 to 1900, when electricity, the internal-combustion engine and running water with indoor plumbing became widespread. This led to other innovations such as air-conditioning, sanitation, high-speed transport, mass communications, home appliances and all the social shifts–including female labor-force participation–and productivity gains that went with them. The computing revolution since 1970 was relatively small potatoes by comparison. To make his case, Gordon points out that productivity growth, and thus economic growth, was higher before the 1970s than after. That’s lack of progress for ya.

The “innovation” crowd is always talking up the growth potential of the next New New Thing. (Social media? Cloud computing? Genomic medicine?) But Gordon believes the low-hanging fruit has been plucked.

The last big tech-based productivity leap in the late 1990s, for example, was short and didn’t create nearly as many jobs as booms past. The upshot: while technology is still doing a good job of displacing workers, it’s not creating the kind of megashifts in productivity and income growth that allow for major increases in standards of living.

Of course, it’s always risky business to bet against the disruptive power of a New New Thing, a fact that Gordon wisely acknowledges with a slew of humorously false past predictions about technology, like when one of the Warner brothers dismissed the appeal of movies with sound when he asked, “Who the hell wants to hear actors talk?” But Gordon also outlines how the foundations of earlier, more-seismic innovation eras–strong K-12 education, more economic equality, better public and private finances and America’s unrivaled position in the world–are either gone or shrinking fast. We’re working against some serious headwinds to create real growth. Whoever ends up in the White House will have to grapple with the fact that growth may never be what it once was.