Wage mandates drive investment toward machines, away from labor

This op-ed appeared September 14, 2017 in the Pioneer Press.

For the last few years there’s been a pretty brutal meme circulating online. You might have seen it. It shows a customer-operated ordering machine in a restaurant with the caption “This is a fast food worker on $15 minimum wage.” New research suggests that those meme makers might have been right.

In a new paper for the National Bureau of Economic Research (“People Versus Machines: The Impact of Minimum Wages On Automobile Jobs”), economists Grace Lordan and David Neumark examine whether minimum-wage laws prompt employers to switch to using machines instead of labor. Their research focuses particularly on “automatable jobs — jobs in which employers may find it easier to substitute machines for people,” such as packing boxes or operating a sewing machine.

This research is important for a couple of reasons. First, studies that have found no adverse impact on employment as a result of minimum wages have generally used teenagers or restaurant employees as a proxy for workers affected, even though this method has significant drawbacks. Second, workers who lose their job to automation are likely to remain unemployed longer. For the most part, the empirical literature on the effects of minimum wages has ignored these workers until now.

Looking at data from 1980 to 2015, Lordan and Neumark find that across all the industries they measured, “increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers.” Raising the minimum wage by $1 equates to a decline in “automatable” jobs of 0.43 percent, they find, with certain industries impacted far more than others. Manufacturing is particularly affected. There, a rise of $1 in the minimum wage drove employment in automatable jobs down a full percentage point. Furthermore, “Within manufacturing, the share of older workers in automatable employment declines most sharply, and the share of workers in automatable employment also declines sharply for women and blacks.” They conclude that “groups often ignored in the minimum wage literature are in fact quite vulnerable to employment changes and job loss because of automation following a minimum wage increase.”

This shouldn’t come as a surprise. Economic theory says that if the price of something rises, people will switch to substitutes. As with Coke and Pepsi, so with labor and machines. What matters is the relative price of labor and capital inputs of equal productivity. If the price of a labor input rises above the price of a capital input, employers will switch from labor to capital. Improvements in technology are pretty much always acting to reduce the cost of capital inputs. This shifts the terms against labor. Artificially raising the price of labor by political decree with minimum wage laws only exacerbates this. Hence Lordan and Neumark’s findings.

The people behind these campaigns like the “Fight for $15,” such as those who struck in St. Paul over Labor Day weekend, might mean well. But, as a great man once said, we should judge public policy on its effects, not the intentions of its advocates. This study adds to the growing empirical literature that shows that minimum wages are poor social policy that often have effects opposite to those intended and hurt those they are meant to help.

John Phelan is an economist with the Center of the American Experiment, a conservative think tank in Golden Valley.