AItomation
The economic growth of the last 150 years has been largely driven by automation – new technologies that allowed mechanization of routine tasks previously performed by labor. The steam engine, electricity, computer chips – all these technologies both contributed significantly to economic growth and destroyed jobs.
The most recent wave of automation – the rise of Artificial Intelligence (AI) – seems to be able to automate not only low-skill, physical tasks but also non-routine, cognitive tasks such as driving cars and making medical recommendations. This seems to spur widespread anxiety that artificial intelligence may create mass unemployment in the decades to come. In this task, you are asked to comment on these developments from an economic standpoint.
a) (10 rp) Consider the following simple model. Suppose in a certain industry (say, textiles) the quantity produced (Q) is equal to the degree of automation (A) times the number of workers (L) Q=AL. The industry is competitive. The wage is fixed at the level w. The demand for textiles is equal to D(p) where p is price, and D is a decreasing function. Economic equilibrium occurs at a price p such that demand equals supply. Suppose the degree of automation (A ) grows so that now the industry needs fewer workers to produce a given amount of textiles. Will the equilibrium number of workers employed by the industry necessarily fall as a result? Provide a verbal explanation of the insight you get from the model.
In the following parts, do not limit your argumentation to the model above.
The supply will grow, which will increase the equilibrium quantity demanded due to price effect which will counter the productivity effect. This might increase the demand for labor and employment (due to sticky wages). Mathematically, one gets
L(A)= \frac{D(w/A)}{A}
The increasing denominator is the productivity effect, while the increasing numerator is the price effect. When the price effect is larger than the productivity effect, L will increase in A. This happens when demand price elasticity is sufficiently large. Mathematically, one may show that the elasticity should be larger than one.
b) (10 rp) A number of authors note that the growth of economic output due to AI and automation will lead to an increase in aggregate incomes, and thus demand, including the demand for new goods and services that are now barely imagined. All this will create new jobs and thus alleviate the problem of unemployment. Criticize this argument.
New goods and services might be in the other fields – different from the fields where AI created unemployment. If new goods and services are AI intensive, the growth of employment might be limited. Here we can talk about Structural unemployment which can be solved in the long-run through training and education. The aspect of low-skilled and high skilled labor should be addressed, since AI is taking over low-skilled jobs and creating high-skilled jobs (partially solving created unemployment).
c) (10 rp) Many people think that publicly financed Universal Basic Income (UBI) is a good solution to the problem of mass joblessness. Identify and address the main problems with the UBI in terms of financing the system and motivation to work (one of each).
Universal Basic Income. Student should look at this concept in complex approach and not just concentrating on the questions asked (very narrow approach).
Universal Basic Income is a concept where students have to keep in mind the positive aspects of the concept:
- Universal Basic Income (UBI) reduces poverty and income inequality, and improves health
- UBI leads to positive job growth and lower school dropout rates
- UBI guarantees income for non-working parents and caregivers, thus empowering important unpaid roles, especially for women.
1) How to finance the UBI system. On one hand, UBI should go to the consumption, thus increasing firms' revenues and generating more income tax and more Government income (there are several strong argument against this assumption). At the same time, research shows that even small size UBI will be expensive for the governments that would just increase a government debt. The issue of taxes should be addressed in this question (Laffer curve).
2) Motivation to work. UBI removes the incentive to work, adversely affecting the economy and leading to a labor and skills shortage. At the same time (not to generalize the answer) student should address how the size of UBI would leave a motivational effect on different income level labor.