According to standard economic theory, labor is a good like any other, traded on the labor market. Like with all other markets, the price for labor, which is the wage, ensures that supply meets demand. When there is a shortage of labor, the price of labor goes up, and more people offer their labor on the market. When there is an abundance of labor, a decrease in the price of labor prevents unemployment.
Economics recognizes that there is not just one market for labor, and whenever necessary, one considers special labor markets which are usually defined by the special kind of labor traded. In this sense, we speak of “labor market for medical doctors”, the “market for unskilled labor’, or the “market for university graduates”.
Obsolete and new labor markets
As it turned out, many labor markets disappeared in the course of history. There is no market for blacksmiths and wheelwrights anymore, but the frequent surnames “Smith” and “Wright” in England suggest that in the past, these were common professions. In Georgia one still has gatekeepers who open and close railway crossing gates, but it is likely that this job will disappear in the next years. In developed countries, the railway crossing gates are opened and closed automatically, without a human being actively involved.
On the other hand, also new labor markets emerge. For example, before the raise of computer technology, there was hardly a market for computer programmers.
Will there always be demand for labor?
Unemployment is a common phenomenon in most market economies. Economics has different explanations for unemployment, like market frictions and qualification mismatch. Yet the most common and most fundamental reason for unemployment is usually identified to be too high or too rigid labor costs, which in most cases are made up primarily by wages. Is this explanation convincing? Would the demand for blacksmiths and wheelwrights go up if their wages would go down? Nobody would make such a contention. But if the demand for entire professions can virtually disappear, how can we be sure that there is always enough demand for labor in general?
A hypothesis as old as capitalism
Starting with the industrial revolution, people feared that the demand for labor might vanish. In the early 19th century, a violent political movement called “The Luddites” invaded factory halls in England and destroyed the machines. They felt that the ongoing automation of production processes would make it difficult for them to sell their labor at reasonable prices. Given the rudimentary technology available in the early 19th century and the enormous productivity gains which occurred ever since, from today’s point of view their concerns seem rather funny. The demand for labor did not fade in the last 200 years. Yet they were right that in principle, there is no mechanism in a market economy which ensures that there will always be (sufficient) demand for labor. In their book “Race against the Machine”, MIT economists Erik Brynjolfsson and Andrew McAfee look at this old question in light of the computer revolution. The argument that we will run out of labor demand is centuries old but always turned out to be wrong. Therefore nobody, including Bynjolfsson and McAfee, dares to predict the end of labor yet another time. Nonetheless, it is clear that many jobs which were recently considered to be solid sources of income might soon become obsolete. Last time that I was in Germany, my parents surprised me with their new vacuum cleaner robot – the robot vacuum cleans the whole house automatically, one just has to switch it on. Will there be demand for cleaning personnel in 10 years? I myself was a bit worried when I read about a software which constructs mathematical proofs automatically. Will there be demand for mathematical economists in 20 years?
What if labor becomes obsolete?
If demand for human labor really declines for these fundamental reasons, we run into various problems. First of all, the biggest part of the economic output (about 60%) is distributed to the people as wages. How will we distribute the fruits of the production process when work input and performance cannot be the criterion anymore?
Secondly, for most people labor has more functions than just being the source of income. What will ordinary people do when they are not needed in the production process anymore? Not everyone is an artist or a Bohemian who has plenty of rewarding options how to spend time. For many people, their work structures their days, and their workplaces are often hotspots of social interaction. Unemployed people tend to degenerate and to lose social connectivity.
As I see it, economics does not have an answer how to tackle such a situation. Let’s just hope that we can go on for another 200 years without labor demand running short!