SPEAKER_00 0:02

Hey everyone, this is Reasonable. A show about economics, business, and politics, and I'm up to I'm excited to speak with my guest today, Professor Peter Orozco. Professor Oratovics and the Chair of Economics at Iowa State University. And with a career that spans over 40 years, it's often researched the areas of labor economics, entrepreneurship, education, and research deals with labor markets in the United States and in developing countries. In today's episode, Professor Arazum and I discuss several aspects of labor economics that range from wages, productivity, and AI to health care and immigration. I hope you enjoy. Peter Arazum, thanks for joining me today.

SPEAKER_02 0:52

Well, thanks for having me. It's an honor.

SPEAKER_00 0:54

So before I kind of get into my first couple questions, uh something I wanted to mention is I'm coming in with a few biases, right? Um I have a little bit of a call it a pro-capitalist slant, a little bit of a of a pro-working class slant. So some of my questions I have a tendency to kind of focus or look for market failures, if you will. But we try to call balls and strikes on here. And one thing I've kind of noticed just in my circles, and I'm sure you have too, is even the the term capitalism, right, is is become a little polarizing. Um and I think it's important to call out you know if and when these these failures exist and so forth. So um that that being said, we're gonna talk a lot about labor and capital and kind of the differences today. So I was hoping you could give me your definition of labor and capital and kind of what's the difference between those two.

SPEAKER_02 1:58

Well, labor is uh the the biggest input into production. And in a capitalist system such as that in the United States, uh most of the people who allocate their time to the labor market are going to be employed by somebody else. And those people are risking their resources in terms of providing plant and equipment, which is what uh economists refer to as capital. And um uh, but then you have a not small fraction of the labor market who employ themselves. So self-employment is a little bit north of 10%, but at some point, uh a good share of of the uh of the labor force, perhaps as much as a quarter, uh, are going to end up self-employed at some point during the course of of their work careers. And and that means you're employing yourself, right? So you're your own boss. Uh and uh and you're your own boss, other than the fact that someone has to buy what you're selling, right? So at the end of the day, um consumer sentiment and the willingness of people to pay for a product is what drives the economy. And uh consumption is about 70% of the US economy in terms of gross domestic product. So at the end of the day, what's driving the decisions of both businesses, firms, employers, uh, but also in some sense, the people that they employ is the willingness of someone to purchase the product. And you have to be able to produce the product at a cost that's below what people are willing to pay in order to stay in business. And uh, and so in in that way, labor and capital are in are on the same team, right? They're in the business of trying to produce something that customers are willing to pay. Uh so Samuel Gompers, who is a lion of the of the labor movement in the United States, said the biggest crime that management can impose on labor is to fail to make a profit. Because at the end of the day, if you can't uh stay in business, uh then uh then labor is going to do poorly. And if you can stay in business and make profit, well, uh some of that is going to get shared with labor. And so that's what drives uh the whole um US uh economic system.

SPEAKER_00 4:45

Yeah, and you mentioned like inputs. I think a lot of people kind of forget that labor is itself an input. And they, you know, everybody who has a job, sometimes you don't think about it this way, but yeah, you are selling your labor.

SPEAKER_02 4:59

Uh and you're renting your labor, that's right. Yeah, yeah. Uh we we it it's it's interesting that we have uh an employment at will system in the United States. Now there are exceptions to that in all in most of the states. Um, but in principle, uh that works both ways, right? Uh a worker can is not obligated to stay with the firm. Uh I mean, the only exceptions to that are are the military and and NFL football. I mean, it's it's interesting that that you have some of these exceptions to the contractual law that basically limits the ability of the firm to to compel the person to stay with the uh with the firm. You can have payback requirements. So if American Airlines trains you to be a pilot, they can expect you to stay with American Airlines for a period of time. But uh these payback uh rules that go beyond about a year start running into uh indentured servitude laws, which uh we take uh uh a dim view of in the United States. One of the interesting things is is these non-compete rules that a lot of um uh uh intellectual property type companies, game developers and so on, have. And and some of those uh non-compete clauses go well beyond one year. And I've always wondered why somebody hasn't really pushed that legally, because my sense is that a non-compete clause that lasts much longer than a year is likely to run afoul of an indentured servitude law. But for one reason or another, they haven't uh they haven't pushed that in in the courts.

SPEAKER_00 7:01

I'm glad you brought that up, and we'll come back to uh non-compete, because I think in general you want fluidity, right? Like you want people moving around, firms, agents, like that's what kind of keeps that healthy competition going, right?

SPEAKER_02 7:15

Absolutely, and and and yet when you look at intellectual property, I mean uh the the rise of in uh information technologies has has led to um the ability for individuals to create intellectual property, and it's really expensive to defend intellectual property. I mean, to get patent protection or copyright protection. And um uh there is uh a potential for abuse in that in that relationship, and so that's one of the things that uh I think we're gonna see a lot more of with artificial intelligence and the ability to in some sense uh take uh intellectual property that has been developed by somebody else but potentially not protected.

SPEAKER_00 8:13

Sure. So I wanted to go back a little bit uh what you mentioned about you know, kind of the first uh thing a business needs to do is make a profit, right? And that keeps the labor and the business kind of rowing in the same direction. Um talking about firms that are very profitable, you hear a lot of people, pundits, right? Um things like labor hasn't kept up with or I should say wages hasn't kept up with productivity. Um you know, capital is kicking the shit out of labor. Uh yeah, you you hear it said in a lot of different ways, but what do you what do you make of that uh claim of wages uh and keeping up with productivity? What do people mean when they say that? And then is there anything to that?

SPEAKER_02 9:04

Um there may be some things to that, but I think in in some ways that's been exaggerated. Uh if you look at measures of labor productivity, which is uh the real output, the the uh consumption value of output, right? So you have to worry about inflation, but so the inflation corrected measure of output per hour, uh, it's it's over three times larger than it was in 1947. And if you look at earnings for labor, they're about two and a half times. So um there's nothing better for wages than an increase in productivity. And historically, um uh labor got about 65%, about two-thirds of the total value of production in the United States. And that has uh potentially gone down just a little bit, but it's still north of 60 percent. And and and what has sort of taken a little bit of the of that wedge, between 65 and 60 percent, is the return to capital, particularly intellectual property. So if you look at um what happened with the computer revolution, it raised productivity a lot, and and the developers of computers and software got some share of that return. But that doesn't mean that labor has been uh un has not benefited from the rise in productivity. It's just that they're not getting the same share that they had uh, say, 25 years ago. Uh but generally if you if you tracked uh we're on the radio, right? Or uh on the internet, whatever, we're on audio. So I can't show you a graph, but if you tracked uh the federal labor productivity data and uh the compensation per hour data, they track each other. I think the correlation between the two series is around 0.98. So uh they still track relatively well.

SPEAKER_00 11:23

And so you are these fluctuations kind of just par for the course uh over time, or is there something different happening?

SPEAKER_02 11:32

Well, uh there is one thing that's sort of interesting, and that is tax law changed whether people who are self-employed take their compensation in the form of the rise in the value of the business, or they take it in the form of income and and and then sell uh and and get capital gains. And so in some some of the apparent decline in the share of labor is related to the fact that the self-employed are paying themselves in the form of the increased wealth that is being generated by their firms, and they're taking less of it in the form of income.

SPEAKER_00 12:20

So I see. So that's kind of messing with some of the numbers.

SPEAKER_02 12:23

Well, it it exp it doesn't explain everything, but it explains at least part of the gap that uh that showed up between productivity and and income after I think it's the 1980, I'm not a tax guy, but in I think it was the 1986 tax law changed the incentives to um to take um uh the profits of the firm in the form of income rather than plowing it back into the firm.

SPEAKER_00 12:54

So I wanted to go back to this um idea of productivity is good. Uh we should celebrate increases in productivity, we should want productivity, whether you're on the side of capital or labor. Because like you mentioned, um, you know, it may not be a perfect one-to-one, but um as productivity uh increases, you know, standards of living, wages, etc. Um something that aside from you know innovation and and companies uh innovating and creating new products and and methods, something else that drives productivity is human capital.

SPEAKER_02 13:36

Right.

SPEAKER_00 13:38

Uh you've done some work around education. Um what are some other kind of driving forces? I know pe people can think of education as increasing human capital and your ability to make more money. What else uh falls into that formula?

SPEAKER_02 13:56

Well, I mean there are a lot of different things of of human capital, and and uh one of the things that I think you're gonna want to come back to is uh the role of technology in increasing uh income inequality in the United States, and that's related to the type of human capital that you have. So um and and so I don't know if you want to talk about that. Let me talk about that first, and then you can divert me back to to other forms of human capital. Um but uh one of the things uh if you compare, say, China to the United States, China has a massive amount of human capital in the form of numbers, and the US has a massive amount of human capital in the amount of skill per worker. And and in historically, although that has now um changed uh considerably, uh one reason why China was specializing in relatively low skill manufacturing is they had an abundant supply of numbers of workers, but they didn't have an abundance of education per worker. And so they focused on investing in um relatively low-skill manufacturing. As China became more educated, as they invested more in the in the schooling of their workforce, uh their wages started to rise, and now some of the manufacturing that used to be in China has now gone on to some other places, primarily in Southeast Asia, where uh the level of human capital per worker is uh not as high. Wages are relatively uh lower, and they're uh taking on some of the type of manufacturing that used to occur in China. In the US, uh we have, I think the average level of schooling per worker in the United States is about 14 and a half years, so a little bit beyond an associate's degree in terms of numbers of years of schooling, and we have very highly paid workers. And so uh going back to that issue of profitability, in order to pay high wages in the United States, uh, labor has to be sufficiently productive to justify that that high wage.

SPEAKER_01 16:38

Yep.

SPEAKER_02 16:39

I I used to tell my intra uh introductory econ students, econ 101 at Iowa State University, um, how many of you think that the U.S. is disadvantaged because we have high wages? And you know, I mean, some people will raise their hands and most of them weren't paying attention or something. But anyway, you know that that's what they would be thinking. And then you say, how many of you think we would be richer if we lowered our wages? And of course, that sounds really stupid, doesn't it? Yeah, but what is one implies the other, right? If we're poorer because we have high wages, then why don't we just lower our wages? Well, that's not the the story. The what we actually have to do is make sure that uh the average worker has enough productivity to justify the high wages, and that's the type of manufacturing that we have in the United States. We are high-tech manufacturing oriented. Where we're not necessarily high-tech, we have uh those are the sorts of manufacturing where uh you have new arrivals in the US, right? So uh meatpacking, for example, doesn't require a huge amount of skill. It's a hard job. And since Upton Sinclair wrote The Jungle in the 1920s, it's been uh an industry that atypically employed uh immigrant workers in the United States. It was a classic first job. They paid well enough for you to get established and to get the heck out of meatpacking, right? So that was the nature of those of those jobs. So um so we are a technology-oriented uh economy. One of the things that happened with information technologies is they atypically benefited people whose skills were complementary with the use of computers. And so that tended to be the people at the upper tail of the education distribution. And so you ended up with computers raising the relative demand for particularly college-educated labor at the same time that it displaced or replaced workers at the lower tail of the skill distribution. And so you had a rising wage gap between college-educated workers and high school educated workers starting in the 1980s, that pretty much continued for the next 25 years. And so over that period of time, the relative reward for a college education relative to a high school education roughly doubled.

SPEAKER_01 19:34

Yeah.

SPEAKER_02 19:34

And that's responsible for about two-thirds of the rise in income inequality in the United States. And uh and that's just because we weren't adding college graduates fast enough to uh to take on uh the rising demand for people whose skills were complementary with information technology. Um, and I know you're gonna want to talk about artificial intelligence. The next question is that what is that going to further that trend or is that going to reverse that trend? And I guess uh I whatever I say there, we're not gonna know the answer. We're gonna find out.

SPEAKER_00 20:18

Yeah. So kind of to say it back to you, kind of like going back to the question you were asking your students, um, really uh I think that the lesson there is we don't want to dictate wages directly. You want wages to follow productivity, and you if you want higher wages, create an environment where workers are more productive. And to do that, you need to increase human capital, a variety of ways to do that. But one of the ways that you mentioned is um education. So we talked about this a couple episodes ago with Professor Hoffman. We talked about externalities a little bit and how, okay, as a society the positive externality of having an education to a certain point is so high that we make it free, right? Public education through high school. I think the obvious question everything you're saying, I guess to me, is why wouldn't we keep educating people? Uh if like if education creates higher productive uh workers with higher wages, uh why wouldn't you just try to educate everybody?

SPEAKER_02 21:31

Well, we we we sort of do, right? So we have free education up through uh grade 12. Um and then uh and then it becomes uh uh more expensive, so the person has to invest in in themselves. Um it's still subsidized, so you you can still get a highly subsidized level of education uh through. Community colleges and through public universities. You still have people who are willing to pay a lot more than that to go to private universities. And in fact, people will decide not to send their kids to a public school in K-12, they will send them to a private school. So why do they do that? Some of it is for religious reasons, but some is for uh the presumed higher quality of education that you may be able to get at a at a private school. Um but the the the impetus for public schooling in the US goes back to the need for an educated electorate in a democracy. And and so then the question is where at what level of education uh do you get smart enough to vote well? Yeah enough. And and here in Iowa, you know, we have this new law that says we're gonna have civics taught at at college. If that's true, it should be free, right? Because that was the whole point of uh the educated electorate, although the presumption was that's what we were learning in middle school, right? We had we had civics in in middle school, and we learned the three parts of the government, we learned how many congressmen and senators there were, and we learned about um the history of the United States. I'm actually puzzled as to where it is that we've found out that that's where our educational system is failing, yeah, and not that uh a third of the kids in Iowa, for example, are not reading at grade level at grade three, and we stop teaching greeting after grade three. You go, isn't that what you should be focused on if you're trying to make sure? So uh one of the real issues, I think, in the public provision of education is it has to be high quality education. And and it seems to me that we have been um way too focused on what people are reading and not whether they can read. Uh, I don't care what the book is, if you can't read it, it doesn't really matter that much, right? There are no pictures or whatever. And and so I I think we need to get back to making sure that in a system like ours, where human capital is what gets you to um uh a place where where you can excel uh economically beyond what your parents were, it's it's it's the educational system that was that that mechanism. And and if we don't have an educational system that offers an opportunity for someone who starts with modest means to ultimately uh become um uh you know uh uh an economic success as as an adult, then we're failing our our our our democratic system. I mean that's what our democratic system is built on, that's what our economic system is built on.

SPEAKER_00 25:20

Hey everyone, Peter and I still have a little bit more to get to, but I hope you're enjoying our conversation so far. With all the noise out there, I still believe word of mouth is that that's what it spread ideas. So if you're enjoying this conversation, please think about sharing this episode with someone else that you think would enjoy. Another way you can show support is to leave a review on Spotify. I'd appreciate it. Okay, back to the show. So I wanted to pivot a little bit to the concept of fluidity and how that kind of keeps prices in the in the labor market and in other markets as true as we can get to, right? Um so I kind of have a theory of the case that I want to run past and kind of get your thoughts on. So in the United States, you want to better your financial situation, you want to better your life, you want to make more money, right? You need a little bit of that running from or a little bit of that fear of, hey, I don't want to be poor, I don't want to be in a financial, you know, um insecure. I don't want to be financially insecure. So I think that all plays into this role of motivating people to go and create businesses, take risks, and that's where a lot of our prosperities come from, right? Um sometimes I wonder I I can get behind that case of you know, you need a little bit of that, which is why you need a little bit of inequality, right? We can kind of start to split hairs about how much inequality is good, bad, whatever. But I think if the goal is prosperity at the end of the day, um I wonder what is that balance of fluidity? So going back to people switching jobs, um it's easy to say if you think you're not paid enough, you know, switch a job, find another employer that's willing to pay you for your skills. Um we'll get to non-compete you already mentioned, but I want to talk about health care and benefits. And if you're an employer in the US, you have to offer benefits to a full-time employee.

SPEAKER_02 27:21

Um you can get around it, but yeah.

SPEAKER_00 27:24

Yeah, yeah. I guess to to just ask the question, like if we had uh Medicare for All or Universal Healthcare or or what have you, uh national nationalized health care is there any studies or evidence or or what have you about how that would help employers or I'm sorry, employees jump around more?

SPEAKER_02 27:46

Because I think there is this thing called job lock, right? So your benefits are tied to your employer. If you have pre-existing conditions, you may not be able to easily move from one um health insurance system to another. And so um that is one of the arguments for why people end up um less able to move from one job to another. Um the Affordable Care Act was supposed to try to make that a little bit less ownersome so that you would be able to switch jobs uh a little bit more easily. I can't tell you that I know of any studies that have looked at whether or not uh job mobility um increased uh after the passage of the Affordable Care Act. But I will say that when they look at at job mobility, it it seems to have decreased in the US over the last uh 10 years, uh, 15 years. Um now that is was blown up with a pandemic, right? So all of a sudden the quit rates in the United States explode, and suddenly people who apparently weren't able to switch jobs uh found it very uh uh advantageous to switch jobs because uh um firms there were what three times as many vacancies as job seekers, that's a great time to quit, right? I mean uh so uh and so I I think that some of the uh uh apparent loss of mobility uh in uh after the between say the Great Recession and the pandemic um uh was uh perhaps deferred job mobility and to some extent the aging of the workforce. Uh I mean if you look at the average work career for somebody in the United States, uh in your first few years after you graduate from school at whatever level, you find a lot of job shopping. So people will be moving from one job to another. Um uh it used to be uh you that on average people might have five jobs in their first uh eight years, something along those lines. And um uh and then what you're looking for is a good match between you and the firm. So if the match between you and the firm is productive, the firm benefits because they're gonna have an atypically productive worker, and the worker benefits because the firm is going to have an incentive to hang on to you and to compensate you for that increased productivity because you have that good match. And so as the population, as the workforce got older, it was natural to have a reduction in in job mobility simply because the average age of the workforce was was rising. Um now the baby boom is is is pretty much um uh uh in retirement age, if not uh near death, like me. So, anyway, so that makes a difference. Um and so uh we're gonna start having more young uh workforce, and and I think you're gonna see a a rise in in job mobility as a result of that. The uh use of the option of working from home uh I think just increased the amount of job shopping that you can do. You can job shop without getting off your couch. Well, that's a new uh experience, right? Now, the firm may want you at some point to park your your butt in a in an office just to see what you look like, but but I think it's become much more fluid in terms of the types of jobs that people can move to. They can move in and out of the gig economy relatively fluidly, for example, if they want to pick up extra cash.

SPEAKER_00 32:08

And I think kind of the through line is mobility and fluidity is good and healthy, right? And you you kind of want policy and uh structures in place where people can leave as a if you're selling labor and you're an employee to leave and jump around easily, and you want firms to be able to hire and fire easily, right? Because if if you make it we don't need to get too deep into that, but if you make it too difficult to fire, you're inevitably people are going to be hesitant to hire. And so you can kind of create um, you know, incentives that you weren't trying to create.

SPEAKER_02 32:48

Um but to return to your your your question, because I went I kind of went uh off on a tangent there, uh certainly most of the of the industrial industrialized economies of the world have some form of national uh health care. Um uh the US has a health system that is uh physician run, not government run. And so one of the things that people forget is that physicians aren't paid as much in national health care systems. And and so uh physicians in the US are are paid a lot. Um now the physicians in the U.S. pay for their education as well, so that's their return on on their not inconsequential investment in human capital. So uh there are a lot of different reasons why we end up with the type of system that we have uh in the U.S. Um and in other countries uh the role of the physician is is as as effectively an employee of the government, and and that does make a little bit of a difference. The intriguing thing in the U.S. is when do we get the rise of health insurance? It's in the 1950s when it turned out that benefits were not taxed, but income was taxed, and firms had an incentive to start compensating workers in the form of pensions and health insurance, which were paid for in after tax income and not before tax income. And and that's sort of how we ended up with the kind of system that we have. Whether we can unroll that system is is is is a mystery to me, right? Uh I I it seems to me that uh uh you have a very large health sector and a very large insurance sector, and whether or not that can all be folded into a very large government sector is i I I I think it I uh my guess is that that that would not be uh an easy task to suddenly switch to uh a European style uh government-run uh health system.

SPEAKER_00 35:22

A a couple other things that I think you mentioned the term job lock, but a couple other examples, like non-compete clauses where uh an employee and a firm basically sign an agreement that says I'm not gonna go work at another company for X amount of time. Um so even if that person quits, they legally cannot go work somewhere else. I think there's probably some differences of opinion depending on where you're at on Obviously, those are valuable to the firm. Uh, but how does that fit into the like some of these models of fluidity we've been talking about?

SPEAKER_02 36:00

Well, uh I I have a lot of concerns about uh particularly lengthy uh non-compete clauses. So you can't go to work, it's not any firm, it's that you can't go to work for a competing firm. Um, but it also then, if if the firm knows that you're not going to be able to take your skills and move them to a competing firm, which presumably would be the most logical new employer, um then the firm has some power over you, right? Okay, what is the value of an employment at will clause that allows the worker to leave? It's that you can compel the firm to compensate you if you're providing productivity to that firm and and uh and the firm renegs on on a on a compensation uh term. And so um uh the longer that you have these non-compete clauses, the more the worker is having to give power in the bargain to the firm, and and that's where you start running into systems where the firm can exploit workers. And and so that's why I think that uh a lot of economists have a lot of concerns with non-compete clauses. And and um I I do think that that uh it's it's overtime for them to start putting the the the stop on how long these non-compete clauses can can uh can go on. I mean a few uh months to a year maybe, but but beyond that I think it it really uh sounds to me that that is uh uh uh that that that's excessive. If you look at the pace of technology, one year is a long time. Uh you know, uh it you could have uh uh two new Apple uh uh additions to the to the iPhone over that period of time, right? So so it it's hard for me to believe that the length of a non-compete clause should be getting longer. It should be getting shorter.

SPEAKER_00 38:30

Well, and a lot of where they started was kind of really high compensation specialty firms, and now it's like a hairdresser might be having a sign and non-compete.

SPEAKER_02 38:44

Yeah, there some of those things are uh they they seem to get a little bit uh precious, right? A little um but you know what do I know? Um I I'm not uh as you can tell, for those of you who are are are are here on audio, I I have been uh not not a great uh customer of of great clips for many years. Uh I think they had to charge finders fees in order to cut my hair. So that was that was that's funny.

SPEAKER_00 39:20

All right, well, let's talk about AI. Um so something this is just like a personal uh opinion. Something that kind of annoys me is hearing all the the tech founders, I guess if you want to call them that, um telling us what's gonna happen in the economy. Uh I don't want to hear from them about what's gonna happen in the economy. I this part of the show is I want to talk to an economist about what's gonna happen to in the economy. Um I think a lot of that is them selling their own book by look at us, our tech is so powerful, it's gonna destroy the world. So um going back to okay, obvious the obvious question of how is labor or how is AI going to affect labor can you uh start with this concept that labor is human labor is in itself valuable and at at the core why we're able to overcome so many technology revolutions?

SPEAKER_02 40:30

Well, I mean we've had a lot of of technological advances over the uh since World War II, and and so far the there's a positive correlation between hours of work in aggregate and uh and productivity. So we have yet to outproduce uh our uh need for workers, that when productivity occurs, it lowers your cost of production. That's what it is. You're the same hour now is producing more stuff than it did before. And who's going to get that stuff? It's going to be consumers, and so if you're increasing the total amount of the pie, and that pie effectively gets distributed back to the people who are producing the pie, then everybody's better off. Now, where that's going to um um uh uh stop working is if consumers don't want what's being produced, right? I mean, the amazing thing so far is that we've wanted to consume that ever increasing pie so that we all have more pie individually. Now, when is that going to stop? Well, it might stop when when people uh decide, well, I'm not gonna work as hard because my uh my proceeds per hour are high enough that I don't, I just don't need to to I my leisure is more important to me or more valuable to me as a consumer item than what I could uh buy with allocating that hour to to productive activities. And that may be eventually what we're going to see. And I don't know if AI is going to finally be the technology that causes the uh amount of time that we allocate to the labor market individually to get smaller. Uh, I mean the average work week in 1900 was uh over 50 hours a week. The average work week uh in the United States now is is uh between 35 and 40 hours. It it differs between men and women, but um uh but uh one of the amazing consumer uh items in the 19 from 1900s to today is the rising uh consumption of of leisure, right? I mean, there weren't a whole lot of uh paid time offs in 1900, right?

SPEAKER_01 43:14

Yeah.

SPEAKER_02 43:15

Not only that, if you think about it, uh life expectancy at birth in 1900 was under 50 in the United States. It's now uh around 77, uh a little bit north of 77 years, right? So we have 27 more years to consume. How are we spending that time? Well, if you look at the average amount of time that um uh Gen Z spends on a phone, they're devoting about half of that increased life expectancy since 1900 to their phone. Uh that isn't that a stunning Statistic, right?

SPEAKER_00 44:02

Yeah, it kind of is.

SPEAKER_02 44:03

Um, okay, so so uh I that just happened, right? That's technology, that's uh that's how we decide to to use our our resources. Um and and there, you know, as an economist, you say, well, if that's what they want to do, that's what they want to do, right? It's not our point to judge. Um, so what will happen with AI? Uh is uh AI going to further increase the rewards that uh more skilled labor, that college-educated labor are going to get? Is it going to act uh displace even more uh people uh who have less uh education? And and the answer is we don't know yet. But there are some studies that have started to look at um how or who has uh been uh affected by artificial intelligence? Uh so there are um studies that look at the incidence of artificial intelligence. So by occupation, which occupations are most heavily influenced by artificial intelligence, which ones are least influenced uh by artificial intelligence? And one study, uh this was done by the Chicago Federal uh economists at the Chicago Federal Reserve Bank. Uh if you look at the pandemic, I mean, all occupations had a reduction in employment, and then you look at the recovery since the pandemic, since AI is relatively recent. Um, and it turns out that uh both groups, the ones that were most heavily uh affected by AI and the ones that are least affected by AI, have had rebounding employment and uh wage growth since the pandemic. But the fastest employment growth and wage growth is the people who are most affected by AI. So the people who um you know appear to be uh have their occupations uh are going to be using AI um uh uh most directly in their in the fulfillment of their duties in that particular occupation. Another study by um Eric Brynjolson and some of his colleagues at Stanford uh University uh looked at by age which groups are are most affected. And it turns out it's the young uh techies who have had uh the most adverse effects of artificial intelligence. And older workers in the same uh fields are the ones who are benefiting, and so that may be where you see the the the fallout is if you're a new programmer or a new coder coming out of Iowa State's computer science program, you may find it uh a lot tougher uh to get a job than it was uh say even five years ago.

SPEAKER_00 47:16

Yeah. So I'm gonna come back to something you said there, which is we might create so much um be so productive if we create so much that consumers don't want what's being produced. But I wanted to bring up something. So I heard um the economist Justin Wolfers talk about he gave he gave this analogy of if you imagine AI is a robot that does your job. And his his whole point of this is it really depends who owns it, right? So he gives the example. If you own this robot and it does your job for you, that's awesome. You you right, you still get your paycheck, you can go to the beach, you can go do whatever the hell you want, and you just your your employer is still paying you and life's awesome, right? Because it just created so much productivity. If you're now if your employer owns that robot, they're getting all that value and your kind of SOL and um but it's great for them, right? And then he kind of keeps going. Well, if the technology company owns that robot and they rent it to your employer for a dollar less or a penny less or whatever you're renting your labor for, now neither one of you are really winning, the employer or the employee. Now it's all that profit from the productivity is going to the technology company, right? Um obviously we don't know how this is gonna shake out, we don't know how it's gonna how that productivity is gonna spread across the economy. Um if we take this utopian view that it's going to everyone is gonna have equal share of the productivity. You're gonna create more than you can consume, and then to your point, then it goes into, oh, I want to consume more leisure or just create less, because you don't have to create as much. I guess I I kind of want to tell you my theory and and get your reaction to it is I heard this crazy stat. I don't even know uh what the exact numbers were, but you'll get the point of the physical security industry, like security guards, is now bigger and employs more people than like high school teachers in the United States. Um and obviously it has just followed like this whole subset of people who whose wealth has jumped enormously and basically have private security, right? Um and it's more of just it's an example of the way who gets to be consumers. Another stat is like that like the top ten percent of of consumers are now um accounting for like half of US spending, right? So I guess my question is if we keep going down to this trajectory if consumers dictate what eventually becomes jobs, are we just going to have like a third of our economy building yachts because that's what that's where all the capital is?

SPEAKER_02 50:22

I don't know. I mean, you know, I at some point, you know, what are there you have necessities and luxuries, right? And so the um industrialized economies have uh devote maybe three, four, five percent of their labor force to production of food. Um whereas the poorest countries will allocate ninety percent of their labor force to the production of food. You know you're gonna need food, right? The question is, how many resources are you going to allocate to the production of food? And the answer is in the US, productivity in food production has increased so much that we allocate a relatively small fraction of our uh time to the production of food, which everybody consumes. It's just that um as productivity has increased, you have a relatively inelastically demanded product, and so all that productivity ends up in a lower cost of food. So if you look at the 1950s, um, people would allocate about a third of their budget to food. We now allocate about a tenth of our budget to food. Um, and half of our budget in food is food away from home. I mean, you know, we don't even produce it ourselves. We outsource the time to produce what we're what we're eating. So, I mean, how we consume is a is a really interesting question, right? Um, and we allocate about 70% now of our economy to the production of services, financial services, educational services, health services, which have uh which are luxury goods, right? They don't allocate that much to those sorts of things in poor countries. So I it's hard, I uh what will be the next uh so you think of uh how does economic development you start with an agrarian economy and then you switch to a manufacturing economy, then you switch to a post-industrial service-oriented economy. There maybe there's a fourth thing out there, and I just don't have the bandwidth right now to know what that fourth thing is going to be, but it could be the leisure economy, right?

SPEAKER_01 52:58

Right.

SPEAKER_02 52:58

And then you think of you were saying yachts. I I I mean, I'm here in Iowa. I'm it's true that we're equally convenient to all oceans right here. I mean, it it doesn't matter, including Hudson's Bay, right? If we we in whatever direction it goes, it's the same distance to to to to to plop that thing in a in the water. But um, but there it may well be that what we're gonna find is that we're going to start allocating our time to other things, including potentially the development of more human capital that will be complementary with these new technologies. One of the things that I try to warn my students is if everything that you know is on your phone, the firm won't hire you, they'll hire the phone. Right? So what is what is it that is going to be required to be able to take advantage of artificial intelligence is you have to be in charge of the technology, not to have the technology in charge of you. And so um I think that's what where the there are going to be large rewards to artificial intelligence, but it's going to go to the people who are using it as a tool to make themselves more productive, not as a crutch, uh to take the place of their own skills.

SPEAKER_00 54:28

So something as I was kind of preparing for this that I realize you and I have in common is both of our parents were not born in the US. That's right. Neither neither of our parents. Um I think you've met I've I've heard you talk about it before, but can you talk a little bit about immigration and kind of on the on the high end as well as the low end of whether it's you know PhD students and uh high-skilled workers, and then some of the kind of low-cost labor that you talked about a little bit earlier?

SPEAKER_02 55:08

Well, I mean, if um the US had a big change in its immigration policies in in uh I think it was around 1966 where we switched from um uh having uh immigration or the weight of immigration based on on skills to family reunification and political um uh refugee status. So that was a change in policy. Before that change in policy, the average education level of immigrants coming into the US was higher than the average education level of of native-born uh Americans. Since then, that has switched. Um and so the average uh education level of immigrants is less than the average education level of native-born uh Americans. On the other hand, the share of the U.S. labor force that is immigration, uh, foreign-born is has been increasing for the last oh about 20, 25 years now. And it's I think it's it's roughly 18% now of our workforce is is foreign-born. And uh if you look at the different resources that we use to produce uh products in the United States, we are a labor-poor country. We have a lot of land, we have a lot of capital, we don't have a lot of workers. I mean, if you look at uh population density, the US is blessed to have a huge amount of land per person compared to almost any place else in in the world. And and so that means that we're constantly trying to find additional people to work. Now, uh you that doesn't mean that you have to have uh uh uh uh completely unregulated immigration in the United States, but but it does mean that we depend a lot on immigrants. And as our population has gotten older, and this is true not just in the US, but it's true of all the industrialized economies of the world, they've gotten older and they need more people. So it's not just the US now, it's every place else that that needs that. And and so the US has actually benefited tremendously by being able to bring in people to fill our uh employment needs. Uh, and some of that is at the upper skilled level, and you'll see that in in um the high-tech sectors. Atypically, the entrepreneurs in the US um in the in the tech sectors are uh foreign-born. Um, but also, I mean, you have that in a lot of the the lower skill jobs. So here in Iowa, um if if we did not have uh foreign-born workers in meatpacking, uh, it would be very hard for us to process all of our agricultural products that are produced by people who are native-born, right? So uh these are complementarities that have been disrupted by the recent immigration policies and the pandemic. And and I think that uh uh we're going to end up effectively by necessity switching to a more uh uh a more welcoming stance in terms of immigration. Uh and and you know, our current quotas are 19, I think we're passed in 1990. The quotas by country. Well, what does that mean? It means it increases the incentives for people to come into the US uh without documentation because there are so many slots there that we're just not filling with legal immigration. So I think I think we really are uh way overdue for for uh uh a reset on on our immigration policy, and and and that's true for at both uh upper skill level and the lower skill level. H1B visas, we have way too few of those as well.

SPEAKER_00 59:42

So uh yeah, I think it's it's um somewhat easy, right, to make a positive case on how immigrants, you know, uh create companies, they create all sorts of productivity and they make our whole country wealthier. I think that's hard to argue. Um but there are a lot of people who who kind of have this feeling of okay, that is a person who's coming here and you just said they're taking this well-paying job. Well, like that could have been my job, right? Like how would you explain that or what would you say to somebody who's like you know, I'm not trying to be hateful, I'm not trying to be racist. But I feel like the more immigrants we let in, they're taking American jobs.

SPEAKER_02 1:00:29

Well, uh you know, I mean, I think the issue there is is um our are what is the uh unemployment rate in the US and and it's exceptionally low. And the average duration of unemployment in the US is typically between three months to six months. We have unemployment insurance that lasts six months in all the states, sometimes longer. And so um uh at least so far, we do not have uh a uh an issue with uh such a a large influx of population that it's preventing native-born workers from finding good work. Uh most of the analysis says that when you have an influx of um uh immigrant workers uh in in the US, the people who are most adversely affected in the form of competition for labor are the previous wave of foreign-born workers, not native-born workers. And so that's where you have the closest um uh substitutability of uh immigrant workers for for non-immigrant workers. But I think when you look at most, if if we had a more rational legal immigration system where you have more control over who it is that you're uh allowing into the US economy, uh, that's only going to uh increase the amount of productivity gains that you get from uh from our immigration policy. So this sort of haphazard, we're going to have a completely out-of-date uh quota based on uh 1990s economic circumstances, and um uh that just increases the incentives for the randomness of of uh uh uh uh people who are going to try to come into the US from from other places uh that are not able to get in through the legal means. And and and I think that that's just dumb. I mean so that doesn't mean that you're not going I mean here in Iowa, I mean I the the the estimated number of of undocumented workers in the population is extremely small. I mean, it's we're not you know San Diego and we're not Miami. I mean, we are Des Moines, and and and so it it it puzzles me as to why this is considered such a hot political topic in a state that has literally one of the smallest fractions of of undocumented populations in the United States.

SPEAKER_00 1:03:44

And if you didn't know better, you would think there could be an incentive to um to keep the status quo because illegal immigration actually keeps wages down since those workers don't have the full protections of American laws.

SPEAKER_02 1:04:03

It it it depends. Um I mean I do think that if you're looking at, for example, agricultural labor, so one of the other things that happened in 1966 was the ending of the Brasero program, which was the uh legal use of um uh uh uh foreign labor, primarily Mexican labor in agriculture in the United States. And and so we now have a a visa system. Uh, I think the H2A uh visa is a temporary agricultural worker system that allows companies to and farms to hire people from um other countries to come into the US temporarily to help, primarily with harvest. But you've seen an increase in H2A workers even here in in the US, in in Iowa, in meat pack in um livestock production and and and other types of agricultural jobs that are more year-round as opposed to seasonal. Um, I think that that's a rational way to do that. And it turns out that if you have an increased use of H2A workers, you reduce the number of undocumented workers being used in agriculture. Well, why don't we just make that easier to do, right? But we make it extremely difficult for people to hire legally, and and when you do that, it just it just creates uh all kinds of issues in terms of um having people who uh you don't have uh good information on uh in terms of everything from taxation and and proper treatment of labor uh to um uh security issues. And other things that you might worry about if you had people who you don't have uh good betting procedures on.

SPEAKER_00 1:06:08

So as we start to wrap up, I have kind of one more hard-hitting question for you. Um you are were a graduate of Gavin Jerome's Comedy College. Yes, that's right. Um tell me a little bit about comedy and the importance of it in your life.

SPEAKER_02 1:06:27

Well, I I mean I laughter's fun. I mean, as you know, that sort of goes uh uh goes along with that. Um and uh Gavin was a touring uh comedian for 15 years, uh, and uh he started teaching stand-up comedy um to uh I think the uh the um Ames uh Toastmasters Club was the first group that brought him in, and then uh and then I was I was part of one of the classes he had up here. Um one of the guys at at church said, Well, you're a funny guy, you ought to sign up for this. And our priest signed up for it uh as well, so that was good. Um uh but um you learn how I I mean uh being able to be a uh a good joke writer, it turns out makes you a better uh economist, a better writer in general, right? Because you work backwards from the punchline. And the longer it takes you to get from the setup to the punchline, the worse the joke is. Uh, because if it turns out the punchline isn't that funny, you just wasted people's time. And so you have to be extremely efficient in order to get um uh uh uh get to uh uh uh an audience to to to you know to have a a a good tight 10 or whatever they call it, right? Tight 10 minutes.

SPEAKER_01 1:08:01

Sure.

SPEAKER_02 1:08:02

And and and so I I I and I've always been you know relatively um uh interactive in in classrooms. It's interesting that when I I do stand-up, I I don't do banter at all. I I I'm focused because I just don't do it enough to where I would feel comfortable just riffing. Um which I some extent when you see somebody coming in uh to Iowa State, you know, we have the maintenance shop has a free comedian every month. And sometimes you know that they have a contract that says that they're going to do 60 minutes and they have 30 minutes of material. So they're going to spend 30 minutes basically BSing with the audience, and and you can tell when somebody just doesn't have enough stuff, right? Yeah, because the the the banter with the audience is so uninteresting and so forced because they have to meet the 60-minute requirement, right? So this they're contractually obligated to provide 60 minutes. It's not 60 minutes of entertainment, it's 60 minutes, and so and so you end up with with you know 30 minutes of jokes, you know, which are you know, sometimes it's really good, but really good banter, you just have to really be on. You have to always be thinking. Um and so uh and on the other hand, when I when I'm in front of a classroom, I can I can riff with with the class without any issues at all. It's just I don't if someone paid something to to listen, uh by golly, they they I I'm not gonna I'm not gonna try to do the uh maintenance shop uh comedian with 30 minutes of material in a 60-minute contract.

SPEAKER_00 1:09:59

Well, we don't have a contractual opportunity to uh keep going here, although it has been fun. So thank you for your time today. Professor Peter O'Razum currently chairs the economics department at Iowa State University. He served as a member of the core team for the World Bank's 2007 World Development Report and wrote papers for the 2008, 2012, and post-2015 editions of the Copenhagen Consensus. If you're interested in viewing some of its comedy, you can find the link in our show notes. Thank you for listening to Reasonable. If you'd like to submit a question or have a guest you'd like to appear on this show, you can email contact at reasonablepod.com. Again, that's contact at reasonablepod.com. If you haven't already, please subscribe to the show and leave a review on Apple or Spotify. And most importantly, share this episode with a friend. Thank you.