Global Reality: Surplus of Labor, Scarcity of Paid Work

by CHARLES HUGH SMITH May 9, 2012

The global economy is facing a structural surplus of labor and a scarcity of paid work. Here is the critical backdrop for the global recession that is unfolding and the stated desire of central banks and states everywhere for "economic growth": most of the so-called "growth" since the 2008 global financial meltdown was funded by sovereign debt and "free money" spun by central banks, not organic growth based on rising earned incomes.

Take away the speculation dependent on "free money" and the global stimulus dependent on massive quantities of fresh debt, and how much "growth" would be left?

What policy makers and pundits dare not admit is that the global economy is entering the "end of paid work" foreseen by Jeremy Rifkin. I have covered this topic in depth many times, starting with End of Work, End of Affluence (December 5, 2008).

The industries that are rapidly increasing productivity and profits are doing so by eliminating jobs and the need for labor. The Web is chewing up industry after industry, wiping out entire sectors that once supported hundreds of thousands of jobs while creating a few thousand new jobs that require high-level skills and mobility.

Robotics are replacing factory labor throughout the world--yes, even in "low-wage" China. When I first toured a variety of factories in China in 2000, many were little more than simple warehouses filled with long tables where workers assembled and packaged cheap light fixtures, etc. by hand. Others had robotic machines stamping out circuit boards that were then hand-assembled into monitors, etc.

The defect rate was high in these settings. Machines are increasingly replacing hand labor in China. Much is made of "labor shortages" in certain southern cities, but what that actually means is a shortage of young workers (overwhelmingly preferred over older workers by manufacturers) willing to work for low wages.

Machines don't go on strike, their wages don't rise by government mandate, they don't call in sick, and they don't need supervision. In effect, workers are replaced by capital invested in robotics and software.

China is already built out. Airports, railway stations, rail lines, subways, highways, stadiums, giant malls, tens of millions of flats--they're already over-built. Nobody dare admit it, but China is already to the point that new construction is either "bridges to nowhere" i.e. redundant or marginal and only funded as a jobs program, or replacement of buildings that are often less than 25 years old, or speculative buildings that are mostly empty and will stay that way.

The Internet has enabled enormous reductions of labor input. A mere 15 years ago when I first learned HTML (1997), you had to code your own site or learn some fairly sophisticated website creation/management software packages, and you needed to set up a server or pay a host. Now anyone can set up a Blogspot or equivalent blog for free in a few minutes with few (if any) technical skills, and the site is free.

A staggering range of complex business services are available for low cost, enabling one person to perform work that a mere 15 years ago required a half-dozen people. Everyone talks about offshoring as the primary cause of jobs being scarce in the U.S., but the much larger force is technology in the form of Web-enabled software.

A mere decade ago publishing a book was a time-consuming, costly venture that required substantial capital and labor inputs. Now it takes less than an hour to publish a book on Kindle and the cost is zero other than the hour of labor. Not only that, but the cost of distributing that book is also near-zero, and the cost to the consumer is a fraction of the cost of print books a decade ago.

That is simply one example of many. Here's another: a tax preparation program that costs $60 can (for the common conventional tax situations) typically replace an accountant that charged $500 or more.

The other trend is the cost of labor in the developed West is rising as systemic friction adds cost without adding productivity. Workers in the U.S. only see their wages stagnate, but their employers see total labor costs rising as healthcare costs rise year after year. In effect, the U.S. pays an 8% VAT tax to support a bloated, paperwork-pushing, inefficient and fraud-laced healthcare system that costs twice as much as a percentage of GDP as other advanced democracies.

A worker making $60,000 a year costs the employer $90,000 a year. No wonder employers are shifting to contract labor (no exposure to skyrocketing healthcare) and part-time flex-labor. No wonder many entrepreneurs are selling their high-overhead businesses and becoming flexible, low-cost one-person enterprises.

When it costs a lot to hire someone, the risk of hiring them rises, too. That is the unspoken context of high-cost economies. The productivity increases enabled by web-based software and services eliminate entire swaths of labor--not for this season or this business cycle, but forever.

If we train 30 million software engineers, will that create 30 million paid positions for these skills? No, it won't. The dynamics of creating jobs is not the same as that of training people to do a job.

I will write more about these trends in the coming days.

Charles Hugh Smith is a novelist and economic commentator who writes for Business Insider and blogs at Of Two Minds.


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