The controversy over the minimum wage has taken center stage recently.
As usual there is more here than appears at first glance. The basic argument for the increase includes points such as: the wage should be enough to serve as a living wage and therefore be “fair”; the increase in wages will be spent and therefore improve consumption in the economy.
The arguments against the increase include points such as: employers will be less willing to hire staff if the cost is higher; wages for entry-level positions are not living wages because people should progress above that level in their career; an increase for the employee is a reduction for the employer who could spend it elsewhere, so this is a zero sum calculation.
There is a second level to consider, which is less apparent.
Increasing minimum wages lessens the difference to the next higher wage level, a result called compaction. Thus pushing up wages at the bottom will eventually push up wages throughout the organization, increasing its costs. Often this cost increase leads to a price increase for the company’s goods or services. This contributes to the overall level of inflation and soon the minimum wage seems inadequate again.
Now let’s address a third level of possible consequence.
One possibility is that the business cannot raise its prices in a competitive environment so the company has less money to spend to improve or to pay the owner, often a small business person. Limits on upgrades to technology and equipment, including maintenance and repair, can cause the business to offer a less-desirable product and then begin to slip until it goes out of business. Or the owner simply accepts less income, realizing that owners of small businesses get the residual, whether a large or small amount, and by definition are the last to be paid.
Another possibility is that the business makes a drastic change in its technology that requires fewer employees, especially at the minimum wage. History provides numerous such examples, but an interesting new one is worth considering.
Much of the wage controversy has occurred in the fast food industry so let them be the example. A company in the Bay Area has developed a totally automated machine that makes custom hamburgers. It grinds the meat and slices the vegetables at the moment of order. You could have beef or half pork and half buffalo with custom toppings without anything growing stale waiting. The machine, which can produce 360 burgers per hour, could be far more responsive to specific orders and deliver a fresher product rapidly.
With such a machine, the fast food store would need fewer, if any, minimum wage folks working the prep line. Those jobs would simply disappear to be replaced by jobs requiring more skill and sophistication to operate and maintain the machine.
The machine would eliminate low wage jobs often called “dull and boring” and replace them with more interesting and skillful jobs, most likely at much higher wages. This would be the argument for using such a machine, while the argument against would be the lament that some jobs were eliminated.
I would offer two lessons to learn from this brief discussion.
First is that the economy at both local and global levels is astonishingly complex. You cannot make any change without a cascade of results, many of which may not be apparent or anticipated.
The second lesson is that society should be very attentive to preparing people to be well-qualified to work in a competitive environment where technology is bringing change at an astounding pace.
Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s in business administration from the University of California, Berkeley. Contact him at email@example.com.