Thursday, 9 June 2016

Minimum Wage

It has been said that if the minimum wage increases automation that is a good thing, because obviously automation is good. However, it is important to understand why automation is good, and when it is not.

The most important thing to understand is that automation is not a good thing per se. There is no reason to prefer machines to do a job rather than people. The reason automation is usually good is because it lowers the cost per unit of output. We can get more stuff using less resources. It is not automation that is good, but productivity.

This suggests an easy case where automation would not be good: if the automation doesn’t allow lower costs per output. If a firm automates and replaces £100 worth of labour costs with £110 worth of capital costs and output stays the same, then this is not really anything to celebrate.

But why would a firm do this? Why would this kind of automation ever happen? Perhaps because laws ban the use of cheap labour. If the minimum wage leads firms to automate, but that automation  decreases the cost of output, then this automation does not increase productivity.

That is not to say that all automation that the minimum would generate would increase total costs, especially given the potential for positive spill over from innovation. But it does suggest that when a government mandate generates automation it is not the same thing as automation that is driven by the profit maximising firms seeking to minimize costs and utilise resources efficiently.

It is entirely possible that high minimum wages lead to a much more automated industry that nonetheless produces much less output because costs are higher. Walking into a restaurant and seeing a touchpad for ordering is not necessarily a sign of economic progress. It could be a sign that businesses are being prevented from using the profit maximising mix of labour and capital. This would be especially inefficient, wasteful, and unfortunate if the workers who lost their jobs are not re-employed. With minimum wage at £7.20 rising to £9, this is certainly a risk in many places.

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