Thursday, October 11, 2007

Labor-Capital and Robots

On Good Morning America on Monday, Mexican President Felipe Calderón, in a discussion on immigration, responded to complaints from US farmers over a lack of farm workers:

It's impossible to stop that by decree. It's impossible to try to stop that with a fence. Why? Because the capital in America needs Mexican workers. And Mexican workers needs opportunity of jobs. Capital and labor are like right shoe and left shoe, and one needs each, the other.

To be sure, capital and skilled labor are likely complementary. Foo and bar are complementary goods if an increase in demand for one increases the demand for the other—for example, left and right pairs of shoes are complements (perfect ones, for most of us, it turns out). With respect to capital and skilled labor, technological advances require more and more skilled labor (with greater and greater skills).

Conversely, substitute goods are those with inverted demands. Butter and margarine are classic substitutes; the demand for butter increases as the price of margarine increases. See also tea and coffee, buying and renting, hooks and prosthetic hands.

I do not, however, believe that capital and unskilled labor are compliments. Instead, like any substitute, as the cost of labor increases, the incentive increases to replace the labor with labor-saving capital. The substitution is bidirectional, too: Technology ushers in more automation and enhanced productivity, decreasing the need for unskilled labor. As labor costs increase, we will see greater demand for robots. In other words, capital and unskilled labor are not like right shoe and left shoe, but left shoe and other left shoe.

President Calderón certainly understands economics; he also knows Mexico's principal export is labor.