We have seen why producers willing to increase their revenue will increase production whenever demand is elastic. You may feel that the explanation was a bit too abstract. What was the real perspective of the butcher? He lowered the employment of labor and increased the employment of machines. This enabled him to lower his prices. The sales increased. Given the new ratio of labor to machinery costs, the butcher has to keep a sufficient number of employees in order to maintain the increased production.
This is why the increased production will lead to less redundancies. But there is more. Production of these new machines also requires some labor. Some machines will be produced by yet other machines that will also require labor to be produced. This is why in some proportion the production will still require labor and other primary factors, or in other words natural resources. The cost of factors of production will in part shift to labor, and in part to the owners of metal ores and other raw materials.
For example: The butcher’s cost of each pound of ham is slightly below $2.83/lbs, split between machinery costs of $1.24/lbs and the same amount of labor costs. Suppose that the butcher bought the machines and laid off some of the employees, and pays machinery costs of $1.36/lbs or 12 cents per pound more, and labor costs of $1.06/lbs or 18 cents per pound less. Let us calculate the butcher’s annual revenue per client:
Before the layoffs: $1.24/lbs x 163 lbs = around $202 equally for machinery and labor.
After the layoffs:
$1.06/lbs x 163 lbs = around $173 for labor,
$1.36/lbs x 163 lbs = around $221 for machinery.
After the layoffs and after increasing production:
$1.06/lbs x 172 lbs = around $183 for labor,
$1.36/lbs x 172 lbs = around $233 for machinery.
As we can see, even though the butcher’s ratio of layoffs to increase in machinery costs was 3:2, the eventual layoffs amounted only to $19 instead of $29, while machinery costs increased by $31, meaning a new ratio of 5:8.
Now for the essential point: The $31 of machinery costs will not simply vanish from the economy. Machine manufacturers will also have to employ labor and other factors of production. Employment in machine factories will increase, as no shift in the ratio of labor to machinery costs occurred there.
Let us now return to inelastic markets, where a decline in prices results in a lesser degree of increase in consumer demand. Given inelastic demand for a specific good total consumer spending on it will decrease, as consumers will rather spend money on other goods. This means that the employment will increase in the other sectors of the economy, for example in machinery manufacturing. Consumers will have more goods, and “technological unemployment” will not appear.
Let us make an important note here. Critics of automation offer dire visions of total and sudden displacement of human labor by machines. They sometimes even allude to the Terminator movies, in which cyborgs have violently eradicated humanity. In their visions employees do not have time for training because they lose their jobs immediately and in large groups.
There is nothing further from the truth. All serious changes in production processes, such as modifications in production lines, fine-tuning of supply chains, adjustments in production scheduling, or even thorough reorganization of the sales system, require time. Such changes need to be tested and implemented gradually and carefully. Some parts of the production process will be modified, while other parts will remain unchanged. The existing employees can be transferred to these departments (to catch up with the overall increase of production).
In reality this process is much more benevolent than it seems. According to research by Earl Tony Halsbury presented in the book The Push-Button World, there is a 2 percent “natural” turnover in industry per annum due to retirement of old and recruiting of young workers. In addition, in stable industries up to 10 percent of employees leave every year for other reasons, for example looking for a better job. Moreover, manufacturers do not want to dismiss even partially qualified personnel, because the costs of training new employees are higher than retraining costs. For these reasons, mass redundancies will not occur even in inelastic markets, because natural and voluntary turnover will protect the employment of workers who are willing to retain their positions.
As Rothbard pointed out, the demand for skilled workers will increase, while the demand for unskilled workers will decline. The latter will be able to retrain or change their profession. Employment will expand in sectors where automation is more difficult, specifically in labor-intensive sectors. The Services sector which includes education, health care, or legal services is labor-intensive; and indeed, empirical studies confirm a stable increase in the share of services in total employment in the last centuries.