What DeeDee the robot tells us about how labor markets work

Minnesota’s entrepreneurs are getting creative in the face of the state’s ‘labor shortage.’ WCCO reports:

The workforce shortage continues to be one of the biggest challenges facing the hospitality industry. The industry is still down nearly 40,000 employees in Minnesota. To address tight staffing issues, Sawatdee Thai Restaurant got creative.

The restaurant, which has five locations including Minneapolis, got a robot named DeeDee assist servers. DeeDee carries food, drinks and dirty dishes between the kitchen and dining tables.

The restaurant said the robot is designed to “automate repetitive manual work which allows the restaurant staff to focus on outstanding customer service.” It is created by a robotics and artificial intelligence company in California.

“It’s been really hard right now to get people at all. In any positions at all my restaurants,” said Harrison.

This story illustrates some vital aspects of how labor markets work.

Minimum wage hikes

First, no employer will hire an employee at a cost greater than they think that employee will add to revenue. This is the real Iron Law of Wages. If the total cost of hiring the worker — wages and other benefits — is greater than the revenue that hiring them generates, then the employer would be adding more to costs than to revenues with the hire — and making a loss — and that is not something businesses do if they want to stay in business.

This is one way minimum wage hikes can lead to job losses. If the minimum wage rate is hiked to a level above what an employer estimates an employee is adding to revenue, they start to lose money on the hire and stop employing the worker. Keeping them on would add more to costs than to revenues.

Figure 1 illustrates this. The employer’s estimate of the worker’s hourly contribution to revenue is a constant $10 an hour. It makes sense for an employer to hire a worker at any cost per hour up to $10. But, at t-16, the minimum wage is hiked, increasing the total cost of employing the worker from $8 an hour to $11 an hour. Employing the worker is now costing the employer $1 an hour more than they are bringing in. They are losing money on the hire. They may terminate the employment or they may cut other elements of remuneration so that, while the wage may rise, the total cost of employing the worker does not.

Figure 1: Effects of a minimum wage hike on an employer’s employment decision

Source: Center of the American Experiment


Labor is only one input that an entrepreneur can use to produce an output — a given good or service. If the cost of that input rises, employers might choose to substitute another input for it, such as capital. This is where DeeDee comes in.

When things are newly invented they are generally relatively expensive, but become cheaper over time. At one time, the idea of a small restaurant chain bringing in robots to serve its customers would have seemed pretty far-out, as it would have been far too expensive. But as technology progresses, such robots have become cheaper. And, at some point, they may become cheaper than workers.

Figure 2 shows this. Initially, it would cost $100 an hour for a robot to replace a worker costing only $8 an hour to employ, so it makes sense to employ the worker. But technological improvements mean that the hourly cost of the robot fall. Eventually, they fall so far that, at t-30, it is cheaper to hire the robot instead of the worker.

Figure 2: Effects of increased labor costs and decreased capital costs on an employer’s employment decision

Source: Center of the American Experiment

This point comes earlier if the total cost of employing a worker rises, either as a result of minimum wage hikes or ‘labor shortages’. In this case, as Figure 2 shows, that point comes at t-29.

The moral of the story…

Labor markets are more complex than people often make out. Even this very simple examination shows that any notion that wages can just be raised by the wave of a legislative wand is foolish and likely to lead to bad outcomes if it fails to take other factors into account.