Want more automation? Then raise the minimum wage
These days the phrase “rise of the machines” has taken on a new poignancy for some Canadians. Governments across Canada are giving low-skilled workers reason to worry their jobs will be replaced by machines—thanks to plans to hike the minimum wage to $15 per hour in Ontario, Alberta and British Columbia.
Perversely, a higher minimum wage will hurt many low-skilled workers as employers increasingly consider automating their jobs.
To understand why, first consider the decision-making process of a business owner. When deciding how to produce a good or service for customers, a business needs to decide how much it will rely on the work of employees and how much it will rely on machines and equipment to perform necessary tasks—what economists call the mix of labour and capital.
Often, the labour of an employee can be substituted with a machine—for example, self-checkout at grocery stores. The choice between labour and capital depends partly on the relative price and the relative productivity of both. If a machine is relatively more expensive for the same level of productivity, then a business owner is more likely to rely on labour. But if labour becomes more expensive or less productive, relying on machines becomes more attractive (all other things equal).
In short, by increasing the cost of hiring someone relative to the cost of purchasing a machine, a higher minimum wage encourages entrepreneurs and businesses to automate tasks traditionally performed by low-skilled workers.
Consider the results from a recent empirical study—co-authored by leading minimum wage expert David Neumark—that explored the impact of minimum wage hikes in the U.S. on employment in automatable jobs (defined as jobs readily replaceable by machines) from 1980 to 2015. Specifically, the study measured the effect on low-skilled workers, defined as those having a high school diploma or less.
The study found minimum wage hikes result in low-skilled workers being less likely to find employment at an automatable job. It also found that those who had automatable jobs were less likely to stay employed after a minimum wage hike. Together, these findings suggest that low-skilled workers are vulnerable to automation after a minimum wage increase.
And of particular importance to the current $15-per-hour debate, the effect of minimum wage hikes on automatable jobs actually increased in recent years. As the authors of the study note, a growing number of jobs are becoming automatable due to technological advances.
By raising the minimum wage to $15, provincial governments are inadvertently giving low-skilled workers reason to fear the “rise of the machines.”