The minimum wage induced spur of technological innovation ought not be praised

In a recent article at Reason.comChristian Britschgi argues that “Government-mandated price hikes do a lot of things. Spurring technological innovation is not one of them”. This is in response to the self-serve kiosks in fast-food restaurants that seem to have appeared everywhere following increases in the minimum wage.

In essence, his argument is that minimum wages do not induce technological innovation. That is an empirical question. I am willing to consider that this is not the most significant of adjustment margins to large changes in the minimum wage. The work of Andrew Seltzer on the minimum wage during the Great Depression in the United States suggests that at the very least it ought not be discarded.  Britschgi does not provide such evidence, he merely cites anecdotal pieces of support. Not that anecdotes are bad, but those that are cited come from the kiosk industry – hardly a neutral source.

That being said, this is not what makes me contentious towards the article. It is the implicit presupposition contained within: that technological innovation is good.

No, technological innovation is not necessarily good. Firms can use two inputs (capital and labor) and, given prices and return rates, there is an optimal allocation of both. If you change the relative prices of each, you change the optimal allocation. However, absent the regulated price change, the production decisions are optimal. With the regulated price change, the production decisions are the best available under the constraint of working within a suboptimal framework. Thus, you are inducing a rate of technological innovation which is too fast relative to the optimal rate.

You may think that this is a little luddite of me to say, but it is not. It is a complement to the idea that there are “skill-biased” technological change (See notably this article of Daron Acemoglu and this one by Bekman et al.). If the regulated wage change affects a particular segment of the labor (say the unskilled portions – e.g. those working in fast food restaurants), it changes the optimal quantity of that labor to hire. Sure, it bumps up demand for certain types of workers (e.g. machine designers and repairmen) but it is still suboptimal. One should not presuppose that ipso facto, technological change is good. What matters is the “optimal” rate of change. In this case, one can argue that the minimum wage (if pushed up too high) induces a rate of technological change that is too fast and will act in disfavor of unskilled workers.

As such, yes, the artificial spurring of technological change should not be deemed desirable!

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