Man vs. Machine: Who will win?

The age old debate: man versus machine. It’s not what you are thinking. I’m not talking about robots, but the automation of the work force. For many years, economists have been engaging in a debate over investment. Should firms invest in men or machines? More technically, economists are discussing two possibilities of investment: human capital and physical capital.  According to a recent article by  Ryan Bhandari of Third Way, investment in human capital has been declining.
Increasing investment in human capital makes workers more productive, decreasing production costs and  increasing output and profit for firms.These are investments in education and training. However, as work is becoming more technical and as advancements in mechanized production are being made, to invest in physical capital (i.e. machinery and software) is becoming more cost effective. Employers are not required to pay machines or software costly health care benefits, pensions, or unemployment if they breakdown. In recent years, these physical capital investments have grown while investments in human capital have fallen.

The figure shows that, overall, training investments have fallen significantly. Over the past 20 years, these investments have surprisingly fallen by approximately one-third. A more automated firm requires more skilled workers to operate machinery. Thus, human capital investment has become even more important!
Different policies have been enacted to incentivize businesses to increase human capital investment, including tax breaks. Worker training costs are now fully tax-deductible for employers. However, similar institutionalized incentives exist for investment in physical capital so we’re still seeing (and should expect to see) a decline in human capital investment.

Anna Graff

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