05/30/2012 05:12 pm ET Updated Jul 30, 2012

The End of Work?

The persistence of 8 percent unemployment three years into an economic recovery has stoked fear that new technologies and increased trade have permanently reduced the demand for American labor. These concerns about permanent job shortages are largely unfounded. However, the quality of new jobs created and the big and widening skill gap in pay represent some of the American economy's great challenges.

Worries about permanently disappearing jobs are hardly new. Eighteenth-century England spawned the industrial revolution and with it the Luddite movement, when one Ned Ludd sabotaged a spinning frame in a futile attempt to protect his job from a machine. Writing in 1849, Karl Marx and Friedrich Engels protested against the tendency of capitalism to cause "enforced destruction of a mass of productive forces." A century later, Harvard economist Joseph Schumpeter built on those ideas to coin ''creative destruction," the term he used to describe a relentless process of economic annihilation and innovation that drives material progress under capitalism.

A striking illustration of this process at work comes from agriculture. In 1870, about six million Americans were employed in agriculture, but only 2.2 million work in that sector today. Still, they produce enough to feed a population that is almost eight times bigger and, in addition, they export 20 percent of their output. That means those workers are now about 25 times more productive. Similarly, in 1950, 14.6 million Americans worked in manufacturing. Today that number stands at 11.7 million, yet total manufacturing output is almost three times greater.

Whereas once over half of American workers were employed in agriculture and manufacturing, less than 10 percent work in those sectors today, with the rest employed in services. Similar trends are evident around the world: manufacturing employment, for example, is falling even in China, not to mention all the advanced countries.

The advent of ATMs and online vendors is now doing to bank tellers and shopkeepers what robots did to auto workers and combine harvesters did to farm hands. Many fear that there is no end to the capacity of information technology and machines to replace a wide array of jobs in services, or at least to relocate them to countries where labor is much less costly.

But even as the great job massacre in agriculture, manufacturing, and some service sectors is occurring, total United States employment is far from declining. In fact, it has grown at a fair clip. The number of Americans in jobs has doubled since 1950, and even between 1990 and 2010, years during which the Internet and personal computers became widely available and the Great Recession wrought havoc, total employment has increased by over 16 percent, a very respectable pace by the standards of advanced countries.

The expansion of occupation in labor-hungry sectors such as health care, education, entertainment, restaurants, and travel that Americans could increasingly afford more than offset the job massacre by a wide margin. Employment by both local and federal government has also grown. The needs of an expanding population -- bolstered by immigrants -- and the reduction of the working week also help account for the continued rise in employment.

So, while large increases in labor productivity, technological innovation, and trade have been with us for a very long time, they have not prevented aggregate employment from rising. As predicted by economists Kenneth Rogoff and Carmen Reinhart based on their careful study of dozens of financial crises, as well by numerous government and private sector forecasters, the recovery from the Great Recession, which entailed the deleveraging of banks and households and the selling off a hugely bloated stock of houses, has been too slow to make rapid inroads into unemployment. That is not enough reason to conclude, however, that the notably flexible and innovative American economy has entered an era of long-term stagnation in employment.

Unfortunately, the quality of the new jobs created and big and widening wage gaps present much thornier challenges. The rising demand for highly-skilled workers and the declining or stagnant demand for (predominantly less skilled) workers that could easily be replaced by machines or outsourced internationally have contributed to sharply increased wage inequality over the last thirty years. In addition, there has been a sharp rise in the share of GDP that accrues to capital to historically very high levels, reflecting the fact that capital benefits from labor-saving technological innovation and, with globalization, can also move more easily to combine with cheap labor overseas. Capital is quite fluid; workers have more trouble moving around.

Taken together, these trends have contributed to a remarkable skewing of the income distribution. Though average per capita income in the United States has increased at 1.6 percent a year since 1980, the gains have been so concentrated at the top that the vast majority of households have seen little advance and the average real wages of male workers have declined (female workers have done better). Closely associated with high and rising inequality are increased poverty and low social mobility -- which is now lower in the United States than in many European countries. Even those who see inequality as an inevitable outcome of differences in performance and are therefore unperturbed by it, should worry about low mobility. Low social mobility is strongly indicative of inequality of opportunity, not just of outcomes, and thus of big waste of human potential.

Overlooked until quite recently, is the role that faltering educational attainment has played in this drama. In their book, The Race Between Education and Technology, Harvard economists Claudia Goldin and Lawrence Katz have shown that wage inequality actually declined during most of the 20th century despite the adoption of transformational skill-biased technologies such as electricity and the automation of many industrial processes.

Inequality declined, they argue, because of a surge in the supply of skilled American workers as high-school and college enrollments soared. That moderated the wages of relatively skilled workers even as the number of good jobs expanded. Less-skilled workers also drew benefit from the increase in the number of skilled workers and the demand they generated for the former's services.

In Goldin and Katz's view, rising inequality over the last thirty years reflects the fact that, while technology continued to race ahead, the rise in educational attainment faltered as the share of Americans completing college and high school stopped rising. At the same time, the United States lost much of its educational edge over other advanced and even some developing countries. An educational system that produces relatively few software and mechanical engineers but plenty of high-school dropouts not only sees the price of the former bid up relative to the latter but also encourages manufacturing firms to produce overseas -- while hamburger joints expand profitably at home.

So, there are indeed big problems associated with U.S. employment, and they are its quality and the widening wage gaps; despite the ongoing struggle to emerge from the Great Recession, the problem is not the economy's intrinsic inability to create jobs. These wage gaps and the increase in capital's share of national income reflect a complex set of forces, including advancing skill-biased technology, the interaction of technology with globalization, the consequent rise in the demand of skilled relative to unskilled workers, and the economy's failure to match this shifting labor demand with supply of adequately trained workers.

The solution to America's employment problems, most would agree, is not to attempt to stop technology or trade, which are paying big dividends in terms of aggregate output. That would be impossible in an open and democratic society anyway. Increased investment in education, whether privately or publicly delivered and funded, is clearly one part of the answer, as is a closer look at how skill needs can be better matched with supply. Those changes would both provide for more equitable outcomes, spread opportunity more widely, and enhance the efficient use of America's most valuable and underutilized resource -- its human capital.

Uri Dadush is senior associate at the Carnegie Endowment for International Peace. He is the author, with Kemal Derviş, Sarah Milsom and Bennett Stancil, of a forthcoming monograph "Inequality in America" (Brookings, 2012).