Assignment III

Lukasz Wieczorek
ECON 360-AB1
March 29, 2017
Question 1:

a. Because the firm is a profit maximizer, the firm will hire labourers until the marginal cost (the
wage of the workers) equals the marginal benefit (the value of the marginal product of labour).
Therefore, in the given formula of marginal product of labour, we can substitute VMPL with W to
derive the labour demand function.
VMPL = 30 – 2L
W = 30 – 2L
2L = 30 – W
L = 15 – W/2

b. Since there are 10 identical firms in the industry, we can multiply the right side of the formula
derived in part a by 10 to derive the market labour demand function, so that we get:
LD = 10 x (15 – W/2)
LD = 150 – 10W/2
LD = 150 – 5W

In equilibrium, labour demand must equal labour supply, so we have:

LD = LS
150 – 5W = 10W
150 = 15W
10 = W

When we substitute this value for the wage into the into the market labour demand function,
we get:
LD = 150 – 5W
LD = 150 – 5(10)
LD = 150 – 50
LD = 100

Therefore, the equilibrium wage is $10 per labourer, and the level of employment in this market
is 100 labourers.
c. Consider the market labour demand function, and convert it so that W is on the left side of the
function:
LDinitial = 150 – 5W
5W = 150 – LDinitial
W = 30 – LDinitial/5

If the government offers a subsidy of $3 per worker, then the wage will increase by $3 for any
number of labourers (that is, W will be higher by 3 no matter what the value of L is). Therefore,
the y-intercept in the function (in this case, the intercept on the W axis), must increase by 3, so
that the above function becomes:
W = 33 – LDnew/5
LDnew/5 = 33 – W
LDnew = 165 – 5W

Under the new equilibrium, labour demand must equal labour supply, so we have:
LDnew = LS
165 – 5W = 10W
165 = 15W
11 = W

When we substitute this new value for the wage into the into the new market labour demand
function, we get:
LDnew = 165 – 5W
LDnew = 165 – 5(11)
LDnew = 165 – 55
LDnew = 110

Therefore, the $3 per labourer subsidy increases the labourers’ wage (from $10 to $11) and
their level of employment (from 100 to 110).
 The phrase “technological unemployment” was first popularized by John Maynard Keynes in

1930s, when he predicted that technological unemployment would be widespread “due to our discovery

of means of economising the use of labour outrunning the pace at which we can find new uses for

labour (Keynes 1933). However, the increased mechanization in the production of goods and services

first became commonplace during the Industrial Revolution in the nineteenth century in England.

Initially, manufacturing technologies were “deskilling”, that is, work that had previously been performed

by skilled artisans was now divided into smaller, more specialised sequences that required less skill, but

more workers, to perform (Braverman, 1974; Hounshell, 1985; James and Skinner, 1985; Goldin and

Katz, 1998). Because physical capital complemented low-skilled labour in the nineteenth century, rather

than substituted it, “the idea that technological advances favour more skilled workers is a twentieth

century phenomenon” (Acemoglu, 2002). Indeed, the modern pattern of capital completing higher-

skilled labour emerged in the late nineteenth century, when steam and water-powered mechanization

was replaced by electrical mechanization. In combination with continuous-process and batch production

methods, the demand for unskilled labour declined in assembly, conveying, and hauling tasks used in

factory assembly lines, electrification allowed much of the production process to become automated,

which increased the demand for blue-collar workers operating the machinery (Goldin and Katz, 1998). In

addition, as firms became larger, and managerial positions increased in complexity and number, the

demand for workers with higher levels of educational attainment (white-collar workers) also increased.

Technological progress has two opposing effects on employment: a destruction effect and a

capitalisation effect. The destruction effect is a result of technology substituting labour, which requires

workers to reallocate their labour supply into a different job or industry, and the capitalisation effect,

where companies enter industries not in danger of being taken over by automation (where productivity

is relatively high), which leads those industries, and employment in those industries, to expand. The

capitalisation effect has been stronger in the past, which is why the economy has been able to adjust to
technological change without total economic collapse. However, computerisation is now entering more

cognitive areas of work (Brynjolfsson and McAfee, 2011), and a decline in the demand for skill has been

documented over the past decade (Beaudry et al., 2013).

It is estimated that about 47% of total employment in the US is at elevated risk of being

automatable during perhaps the next one or two decades (Frey and Osborne, 2017). (This time frame is

approximate, and is dependent on how effectively several engineering challenges for automated

machines can be overcome, including perception and manipulation, social intelligence, and creative

intelligence.) The equivalent figure in Britain is 35% of the workforce (where workers are more likely to

work in creative fields), but 49% of the workforce in Japan (Economist 2016). Those who are most likely

to have their jobs taken over by automation include workers in transportation and logistics operations,

as well as most administrative and office support workers. Self-driving cars are being developed and the

technology for the required sensors is becoming cheaper. Additionally, domains reliant upon storing or

accessing information can now be entered by algorithms used for big data. Another category of jobs at

elevated risk of being replaced by automation are services, sales, and construction occupations (such as

cashiers, counter and rental clerks, and accountants). This is due to the market for personal and

household service robots growing by 20% annually (MGI, 2013), and that the comparative advantage of

human labour in the areas of mobility and dexterity is predicted to decrease over time. By contrast,

generalist occupations that require knowledge of human heuristics and specialized occupations which

involve the development of novel ideas and artifacts are among the jobs that are least likely to be

replaced by automation in the future. Jobs in these categories include management, business, and

finance occupations (all of which require a high degree of social intelligence), and most occupations in

education, healthcare, and arts and media jobs (occupations that require a specialized knowledge of

human heuristics that is unlikely to be replicated by computerized technology). As well, engineering and
science jobs are also the least likely to be overtaken by automation, due to the high degree of creative

intelligence that is required in the positions (Frey and Osborne, 2017).

According to figures published by the Federal Reserve Bank of St. Louis, employment in non-

routine cognitive and non-routine manual jobs has grown steadily in the United States since the 1980s

(“Automation and Anxiety”, 2016), while employment in jobs that are categorized as “routine” has

declined during the same time. This phenomenon has been attributed to automation, and this trend is

likely to continue in the future. However, predictions that humans will be entirely redundant due to

automation have been made since the Industrial Revolution, when the Luddite riots (Luddites were

textile workers during the Industrial Revolution) between 1811 and 1816 took place because of the fear

that these workers had that machines and steam engines would destroy their livelihood (Mantoux,

2006). More recently, John F. Kennedy stated that the major domestic challenge of the 1960s was to

“maintain full employment at a time when automation…is replacing men” (“Automation and Anxiety”,

2016). However, in the past, automation has ended up creating more jobs than it has rendered obsolete.

It has been theorized by David Autor (2015) that although some tasks in current middle-skill jobs are

likely to be taken over by automation, many middle-skill jobs will still require a variety of different skill

levels. For example, medical support occupations still require knowledge of mathematics, life sciences,

and analytical reasoning, and skilled trade and repair occupations (like plumbers, builders, automotive

technicians, etc.) are also at less risk to be replaced by automation. Although it is unlikely that

automation will replace the need for any humans working at a job, labour markets will be disrupted by

the technological change, and the government and employers will need to simplify the process for

employees to acquire new skills and switch jobs in the future as automation has a greater effect on the

economy (“Automation and Anxiety”, 2016).

References:

Acemoglu, D., 2002. Technical change, inequality, and the labor market. J. Econ. Lit. 40 (1), 7–72.

Automation and Anxiety; the Impact on Jobs. (2016, June 25). The Economist (US).

Autor, D. H. (2015). Why Are There Still So Many Jobs? The History and Future of Workplace

Automation. Journal of Economic Perspectives, 29(3), 3-30.

Beaudry, P., Green, D.A., Sand, B.M., 2013. The great reversal in the demand for skill and cognitive tasks.

Technical report, NBER Working Paper No. 18901. National Bureau of Economic Research.

Braverman, H., 1974. Labor and Monopoly Capital: The Degradation of Work in the Twentieth Century.

NYU Press.

Brynjolfsson, E., McAfee, A., 2011. Race against the machine: how the digital revolution is accelerating

innovation, driving productivity, and irreversibly transforming employment and the economy.

Digital Frontier Press, Lexington, MA.

Frey, C. B., & Osborne, M. A. (2017). The future of employment: How susceptible are jobs to

computerisation? Technological Forecasting and Social Change, 114, 254-280.

Goldin, C., Katz, L.F., 1998. The origins of technology-skill complementarity. Q. J. Econ. 113 (3), 693–732.

Hounshell, D., 1985. From the American System to Mass Production, 1800–1932: The Development of

Manufacturing Technology in the United States. vol. 4. JHU Press.

James, J.A., Skinner, J.S., 1985. The resolution of the labor-scarcity paradox. J. Econ. Hist. 45 (3), 513–

540.

Keynes, J.M., 1933. Economic possibilities for our grandchildren (1930). Essays in persuasion. pp. 358–

373.
Mantoux, P., 2006. The Industrial Revolution in the Eighteenth Century: An Outline of the Beginnings of

the Modern Factory System in England. Taylor & Francis US.