What do we do with workers who get replaced by robots?

(Originally posted by Pat in 3/2012)

My radical proposal: Pay them more.

The basic reason is thus: When you replace workers by robots, you do so because the robots are more efficient—they produce more goods for the same cost. Hence, your company ends up with more goods, and hence, if you continue to pay your workers the same share, you'll end up paying them more in absolute amount.

Suppose that there is some amount of resources we have to work with. If we use manual labor, we can make a certain amount of goods from those resources G_1. These goods in turn have some amount of value, V(G_1). If instead we use automation, we can make some larger amount of goods for the same amount of resources, G_2 > G_1. Assuming only that more stuff is better (mathematically this means that the utility of goods is monotonic increasing), we know therefore that the value of these more goods will also be higher V(G_2) > V(G_1).

If we use manual labor, the workers will be paid certain portion of the goods made, while the shareholders will receive the rest. Let's call the fraction that the workers get w. Obviously 0 <= w <= 1; if it were 0, the workers would be slaves, and if it were 1, the shareholders would get nothing (sort of Marxist I suppose). A likely value for w might be say 0.30, meaning that 30% of the value of goods produced goes to the workers who produce them. (This is based on empirical studies guided by the Cobb-Douglas model.)

Under our current system, the fraction w that workers receive changes when we switch to automation; indeed, it typically goes to zero. But we wouldn't have to do it this way; instead consider what happens if we hold w constant.

Then, what we find is that the amount given to the worker increases from w G_1 to w G_2. Similarly, the amount the shareholders receive increases from (1-w) G_1 to (1-w) G_2. Since the w is the same and the G is increasing, the product of the two increases---and it increases for both the workers and the shareholders.

The reason we don't do this in our current system is that we don't think of it in terms of distributing goods---we think of it in terms of paying for labor. Since the worker is no longer laboring, why pay them?

This sounds reasonable at first, but consider this: Why give that money to the shareholder? What did they do to earn it? All they do is own a piece of the company. They may not have contributed to the goods at all. Honestly, on a pay-for-work basis, we should be paying the robot!

In fact, there is a very simple reform that would effectively hold w constant. Instead of paying workers in cash, pay them in stock. That way, the worker becomes a shareholder. A worker who currently receives a $10,000 salary would instead receive enough stock to pay a $10,000 dividend for that year. We know the company has enough money to do this---they were planning on paying the $10,000 anyway. The difference is, if the worker ever gets laid off because he was replaced by a robot, he keeps all the stock he has earned and continues to collect dividends.

And if it bothers you that the worker collects dividends even when he's not working---why doesn't it bother you that shareholders do exactly the same thing? By definition, a shareholder is paid according to what they own, not what they do. All this reform would do is make workers into owners.

If you justify the shareholder's wealth by his past labor, again you can do exactly the same to justify the worker's stock holdings. There's simply nothing to justify the shareholder that can't also justify the worker's shares.

Couldn't workers just buy stock with their salary? No, they really couldn't—because they only receive the amount equal to the dividend, not the total value of the stock. Hence, they could only buy about 10% as much stock from the cash as they rightly deserve to own in terms of sharing profits.
What incentive do companies have to do this? In the absence of regulation, none. Just as psychopaths have few incentives not to murder in the absence of government, and people in a Prisoner's Dilemma have little incentive to cooperate. What's needed is a moral re-evaluation. The question is not, “Why would companies do this?” but instead, “Why do we let them get away with not doing it?” Obviously the strong will often be able to take advantage of the weak; but why stand by and allow this to happen?