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The Economist's Ryan Avent published a terrific magnum opus over the weekend suggesting that wage increases and automation are closely intertwined.

Mr. Avent writes, "whether or not a task is automated depends upon the relative supply – and the real wage – of workers of various skill levels."

The implication is that the long awaited inflation-adjusted growth in U.S. wages – which finally appears to be happening – will be self-limiting.

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As wages climb, corporate motivation to limit employees through robotics or (more likely) software rises with it. A company, for example, with a $20-million increase in wage costs will be far more likely to invest $10-million in new software that will allow them to lay people off.

Tyler Cowen, an economics professor at George Mason University, notes that global airlines are an excellent gauge of the employment-destroying progress of automation. Check-in staff may soon go the way of the buggy whip; Quantas Airways Ltd. is testing permanent baggage tags, and American Airlines Group Inc. expanding self-tagging at Boston, Austin and Orlando airports.

Inflation, which reduces real wage costs, would be a big help in maintaining employment growth. If inflation stays sluggish, the recent gains in U.S. real wages will be short-lived – companies will scramble to automate.

In sector terms, the outlook for U.S. retail stocks may remain murky even if the economy accelerates. A technology-driven ceiling on wage growth means the U.S. consumer might never achieve the gluttonous pre-crisis heights of the 2000s.

Conversely, the more wages improve, the better the prospects will be for robot-building companies like Rockwell International Corp., ABB Ltd. and Japan's Fanuc Ltd.

The inexorable spread of new technology, and its proven ability to replace both blue- and white-collar jobs will severely limit the degree to which market forces can address the rising levels of North American economic inequality. Eventually, policy will be needed to address the issue to prevent a return to a feudal, capital-dominated economy.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More


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