Rising minimum wages make automation more cost-effective

Darrell M. West and Jack Karsten

The movement pushing for a $15 per hour minimum wage has succeeded in several large cities like New York, Los Angeles, San Francisco, and Seattle. These minimum wage increases coincide with falling prices for computers that can replace human labor in some low-skill jobs. A higher minimum wage changes cost considerations for businesses seeking to automate more of their operations. Increasingly, low-skill workers will not only have to compete with each other for jobs at higher wages, but also with computers. Staying competitive in a changing job market will require workers to specialize in tasks that computers cannot easily perform.

Two trends converge

The federal minimum wage, currently set at $7.25 per hour, is not tied to inflation, so Congress must periodically raise it to maintain its value. At the state level, only 10 states have minimum wages that increase annually with the cost of living; a further five states and the District of Columbia will introduce annual increases in the future. These annual increases forgo the need for large adjustments to the minimum wage at irregular intervals. In addition to benefiting workers, it would allow employers to slowly adjust to wage increases. If the price of labor rises too quickly, businesses have a bigger incentive to replace human labor with automation technology.

Automation involves the substitution of machines for human labor. Historically, automation has reduced or eliminated some job categories while simultaneously creating new ones. During the Industrial Revolution, new farming machines reduced the need for agricultural labor just as factory jobs were opening up in cities. Likewise, the spread of personal computers, the Internet, and smartphones have greatly expanded the number of jobs available in the service sector. As computer functionality improves and computer prices fall, the labor market is bound to undergo further changes.

The food service industry in particular is at the center of both the fight for a higher minimum wage and the introduction of automation technologies. For example, employee scheduling software can match staffing levels with high and low customer demand. Tablet computers placed at tables allow customers to order meals and pay for them without the intervention of a waiter. In the same way, self-service kiosks can replace cashiers at fast food restaurants, and smartphone apps enable customers to order and pay before arriving. Computers are changing food service just as they have for many other industries.

Upgrading workforce skills

As computers replace humans for some minimum wage jobs, it will force displaced workers to upgrade their skills in order to stay competitive. Knowing how to manipulate computers in a work environment will become an increasingly important skill for most workers. In addition, workers will need to specialize in areas where humans excel relative to computers, such as interpersonal skills. To acquire new these new skills, minimum-wage workers will need access to more education and training programs.

These second-order effects of automation and skills demand must be taken into account by lawmakers considering a minimum wage hike. Rising wages make computers cost-effective for an increasing number of low-skill tasks. Displaced workers will have to learn additional skills that reflect a work environment that relies on more computers.  Enacting automatic increases to the minimum wage would gradually change the cost of labor relative to computers, giving both workers and employers more time to adjust. Additionally, lawmakers should pair minimum wage increases with training programs that upgrade the skills of workers whose jobs are at risk of automation. The compounding effects of automation and the minimum wage will require a combination of solutions.