FOMC: All options open

Over-reliance on employment gains

And revisiting a topic that we (among others) have pointed toward at many junctures since the 2008-2009 Crisis, employment since the Crisis is not the same as pre-crisis employment tendencies. Thanks to the Financial Times for Thursday’s U.S. edition, page 1 graph suggesting why the post-crisis job gains are generating neither the inflation nor consumer spending levels that even lower pre-crisis levels of employment had fostered.

The ostensible improvement that saw the United States lead those gains has now also seen other countries catch up to some degree. Just this week we got the news that the Euro-zone finally saw employment levels surpass the pre-crisis levels.

Middle-skilled hollowing out

That’s all fine and good. Yet the real story is the hollowing out of the well-paid jobs in middle-skilled employment. Between 1995 and 2015 those dropped roughly 10% or more in the UK and most of Europe outside of Germany, where they still dropped 8%. And the United States, Canada and Japan saw them drop more than 5%.

While there has been a rightful focus on offshoring of manufacturing jobs from higher cost centers (at first from the developed economies), much more of that is based on the automation of classic skilled labor tasks. And as the Financial Times graphic notes, that tendency has also been within industries.

The latest predation of automation on human employment is the degree to which artificial intelligence (AI) is now impacting classic low-mid level white collar skills. Of late big firms in the legal profession have found rote research functions can be shifted away from junior lawyers. The AI programs which can research legal databases are not only less expensive (including no vacations, healthcare coverage or pensions), they have also been found to be much more reliable. Much like the previous revolution on the factory floor, the highly rhetorical question is, “Who is better at tedious repetitive tasks, humans or machines?”

Central banks need to adapt

This is why total employment in and of itself should no longer be such a key element that central banks count on as part of their economic and inflation models. They need to move to a more nuanced view, and we will allow that they already are very aware of the ‘downstream’ indications like consumer confidence and spending.

That said, the further AI progresses, possibly the more so central bankers should also be concerned that they can be replaced at some point. While that is likely quite ways down the road, in the context of recent and projected AI advances maybe all options are open there as well. Hmmm.

Thanks for your interest.

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