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Tuesday, June 14, 2011

Karl Smith: Capital vs. Labor

Karl Smith makes a good point:

Capital vs. Labor, by Karl Smith: Catherine Rampell is exploring a thesis about the hiring practices. A sample

On Friday, I wrote about how equipment and software prices are getting rapidly cheaper while the cost of labor has been getting more expensive, making capital a more attractive investment to companies than people. Tax incentives that encourage earlier capital investment may be helping, too.

Importantly this only makes sense if capital and labor are substitutes in production. Typically we think of them as complements.

Lets take some obvious examples. Suppose to create welded metal I need both a welder and welding torch. The welding torch goes down in price. That means that its actually cheaper to create each piece of welded metal. This will allow me as a factory owner to either lower my price, sell more welded metal while maintaining my profit margin.

However, to do this I will need more welders. So a fall in the price of welding torches, increases the demand for welders.

On the other hand suppose that I am an airline considering whether to have more booking agents or whether to invest in more sophisticated booking software. Specialized software can run well into the multi-millions but if it gets just cheap enough it might actually be a better deal than new agents.

So the falling price of capital alone isn’t enough. It depends on how the capital interacts with the workers. Moreover, it would take some fancy math to show this, but until capital can do everything labor can do – that is until the singularity – some types of jobs must be complements to capital.

Those jobs will always be in more demand as capital get cheaper. The question is how much skill you need to do those jobs. This is the whole issue of skill-biased technological change.

Let me add that within this framing of the question, one fear is that technology is producing more and more substitutes for labor than ever before, digital technology in particular, and there is uncertainty about what that means for the future.

    Posted by on Tuesday, June 14, 2011 at 12:15 AM in Economics, Productivity, Technology, Unemployment | Permalink  Comments (76)


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