Thursday, January 22, 2009

How can innovation create jobs

In the middle of a labour crisis it is very easy to stick one's nose up to innovations -- especially innovations that make workers more efficient. It's seems apparent on its face that the last thing we want to do is maintain the same level production with fewer employees. Efficiency is the enemy; we do have a demand shortage right?

But what is easy to forget about is the production that isn't happening that could be. Consider that an investor can buy some form of labour for $x/hour (because this is the market price for labour). And with one hour of labour he can produce m units of value, worth $k/unit, giving us $y/hour. If $y<$x this transaction doesn't happen and the employee is left unemployed and $x begins to drop creating deflation. But if you can raise $y above $x with technology - allow the worker to produce more units in that one hour - then you have a new source of employment.

And the amazing thing is this change of employment isn't gradual or continuous. Let's assume $y is already discounted for risk and rate of return from competing investments. Then if $y>$x investors will immediately be motivated to buy as much labour hours as they can until the increased demand for labour raises $x above $y; or until there is so much production $k drops until $y is below $x.

The quickest example I can think of this happening is highway building creating a demand for truck drivers but I'm sure others can come up with much better example.

But the point is the change in worker demand isn't continuous against $x-$y: it's quantum. So where are these discontinuity points? What are the industries that are waiting to for an efficiency innovation to occur? I don't know. But I'd much rather be searching for these points by raising the amount of output a worker can create (m) than by lowering the amount of payment a worker can demand (x).

Addendum thought: Unfortunately between these discontinuity points worker demand does decrease as efficiency increases. I'm sure before someone realized they can create a trucking industry with new highways many salesmen lost their jobs because fewer salesmen were able to cover a larger area.

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