Preparing for Automation- Minimum Wage Laws Destroy Unskilled Labor

In feudal Europe roughly 90% of the population belonged to the peasant class, and the vast majority of peasants were farmers. Without modern farming equipment it was a very labor intense, painstaking process to farm land, requiring large numbers of people. Then the ox drawn plow came along, and cut the number of people needed to farm land in half. More technology came into play and today in developed countries like the United States, the percentage of the population working in agriculture is 1.6%.

The same trend has occurred in many industries such as; automobile manufacturing, finance, and publishing. All of these industries have seen a decline in workforce participation because less people are needed to accomplish the same task. One of my favorite visual representations of the decline in workforce participation in finance is this image of a Connecticut trading floor years ago compared to today.

one-devastating-picture-of-a-wall-street-trading-floor-says-it-all

The automation of work has only just begun. Google’s self-driving cars are going to be on the street any day now, and that assuredly means that we are going to begin to see self-driving Uber cars/Taxis. Fast food workers are quickly being replaced with machines that automatically flip burgers and fill up drinks. Translators may be a thing of the past with this new device that translates in real time. There are millions of jobs that exist today that will not in a decade.

The Problem

Automation is generally considered a good thing, as it makes the manufacturing of goods and the providing of service more efficient, but what happens if automation gets to the point where there are not enough jobs for every household? In the UK, roughly 47% of the jobs today will be gone in the next two decades. There are roughly 18.9 million households in the UK and 31.8 million jobs, if 47% of those jobs were lost without being replaced the result would be that only 16.8 million jobs exist for 18.9 million households. New jobs will be created, but the question is what rate will they replace the obsolete jobs?

We are moving to a world where there is less work than there are people. While the reality may be decades away, it is a reality nonetheless. The question arises as to how the world functions when there is not enough work to go around.

Some countries have already begun to prepare for a mass exodus of people from the work force, toying with the idea of universal basic income. Individuals are allowed to keep the income whether they decide to work or not; that is to say every single person will receive a UBI, not just those who are in poor economic status. Proponents of UBI claim that in a world where automation has taken not just the well paying jobs, but paying jobs period, there needs to be a basic allowance for all individuals so that we do not see millions slip into poverty due to perpetual unemployment.

I reject this notion. The trend of seeing jobs lost to automation is largely a function of an ever increasing minimum wage which makes automation financially appealing, as labor has become artificially expensive.

Flaws in the Reasoning of the Universal Basic Income

Automation means that the goods and services people rely on are going to go down. Self-driving cars mean that we no longer will need to pay insurance to drive, and once the fleet of Self-Driving Ubers/Taxis come onto the market who is to say that anyone even needs to own a car anymore?  Food workers having their work automated means these establishments will become more efficient, and in turn prices will become more competitive. As assembly line workers become less necessary, the prices of the goods assembled will drop. The basic point being that as automation replaces jobs, it will also drive the price of goods and services down, meaning the cost of living will go down and in turn people will simply need less money in order to survive.

The cost of living in the United States is roughly $28,000 per year (although this varies greatly from city to city, state to state). Meaning on average an individual would need to work 40 hours a week, 50 weeks a year, at a rate of $14/per hour, to live in the United States (without government assistance). Let’s say that automation replaces 47% of current jobs, as previously mentioned in the article, and for the sake the argument let’s assume that the cost of living also declines 47%. That would peg the cost of living to be $14,840 per year. Meaning that on average an individual would need to work 4o hours a week, 5o weeks a year, at a rate of $7.42/hour in order to survive, which is only $0.17 more than the current federal minimum wage. Setting the cost of living decline at 47% is rather presumptuous, but the basic idea remains the same; as automation increases prices go down, less money is required to live.

UBI rests upon the assumption that in the future there will be less jobs than there are people, and I believe that this will hold true under one condition; the minimum wage continues to increase. In San Francisco, where the minimum wage is now a whopping $13/hour, we are beginning to see the advent of things like fully automated restaurants. Why aren’t we seeing these pop up in places like, say, Texas, where the minimum wage is $7.25/hour? The obvious answer is that the price of labor in San Francisco has been artificially inflated. Unskilled, low wage labor in San Francisco did not increase in value with the implementation of a $13 minimum wage, only in price.

Minimum Wage Laws, Real World Application

Let’s do a simple exercise. If a 24/7 McDonalds requires in total 120 hours of minimum wage labor in order to function (i.e. 5 employees working around the clock, this is also a very presumptuous number, it could very well be higher than this), that means the daily operating cost for labor is $870 per day, $317,550 per year. If that same McDonalds saw the price of unskilled labor increase to $13/hour, that would change the operating costs for labor to $1560 per day, or $569,400 per year, a $251,850 difference. In 2014, 77.2 million people above the age of 16 were paid the minimum wage in hourly wages.

The initial cost of installing machines to automate processes previously handled by workers is hefty, and upkeep on the machines can be expensive, but if labor costs, inflated by an artificial price on wages, rise above the cost of installing automation, companies will opt for automation every time. By artificially increasing the cost of unskilled labor we are driving the push to automation by making unskilled labor unaffordable.

Conclusion

Automation will undoubtedly cause jobs to disappear, but it will also make the cost of living go down. As the cost of living goes down people won’t need to work as much, or for as high of a wage, as they previously needed to in order to survive. The only way that automation will completely eclipse traditional labor, specifically for those unskilled, is if government price controls effectively make it illegal to work if your skillset isn’t worth the artificial minimum price of labor. A UBI isn’t going to be necessary unless the price of unskilled labor is arbitrarily set above its true value.

 

 

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