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!

How poor was 18th century France? Steps towards testing the High-Wage Hypothesis (HWE)

A few days ago, one of my articles came online at the Journal of Interdisciplinary HistoryIt is a research note, but as far as notes go this one is (I think) an important step forwards with regards to the High-Wage Hypothesis (henceforth HWE for high-wage economy) of industrialization.

In the past, I explained my outlook on this theory which proposes that high wages relative to energy was a key driver of industrialization. As wages were high while energy was cheap, firms had incentives to innovate and develop labor-saving technologies.  I argued that I was not convinced by the proposition because there were missing elements to properly test its validity. In that post I argued that to answer why the industrial revolution was British we had to ask why it was not French (a likely competitor). For the HWE to be a valid proposition, wages had to be higher in England than in France by a substantial margin. This is why I have been interested in living standards in France.

In his work, Robert Allen showed that Paris was the richest city in France (something confirmed by Phil Hoffman in his own work). It was also poorer than London (and other British cities). The other cities of France were far behind. In fact, by the 18th century, Allen’s work suggests that Strasbourg (the other city for which he had data) was one of the poorest in Europe.

In the process of assembling comparisons between Canada and France during the colonial era (from the late 17th to the mid-18th centuries), I went to the original sources that Allen used and found that the level of living standards is understated. First, I found out that the wages were not for Strasbourg per se. They applied to a semi-rural community roughly 70km away from Strasbourg.  Urban wages and rural wages tend to differ massively and so they were bound to show lower living standards. Moreover, the prices Allen used for his basket applied to urban settings. This means that the wages used were not comparable to the other cities used. I also found out that the type of work that was reported in the sources may not have belonged to unskilled workers but rather to semi-skilled or even skilled workers and that the wages probably included substantial in-kind payments.

Unfortunately, I could not find a direct solution to correct the series proposed by Allen. However, there were two ways to circumvent the issue. The most convincing of those two methods relies on using the reported wages for agricultural workers. While this breaks with the convention established by Allen (a justifiable convention in my opinion) of using urban wages and prices, it is not a problem if we compare with similar types of wage work. We do have similar data to compare with in the form of Gregory Clark’s farm wages in England. The wage rates computed by Allen placed Strasbourg at 64% of the level of wages for agricultural workers in England between 1702 and 1775. In comparison, the lowest of the agricultural wage rates for the Alsatian region places the ratio at 74%. The other wage rates are much closer to wages in England.  The less convincing methods relies on semi-skilled construction workers – which is not ideal. However, when these are compared to English wages, they are also substantially higher.

Overall, my research note attempts a modest contribution: properly measure the extent to which wages were lower in France than in Britain. I am not trying to solve the HWE debate with this. However, it does come one step closer to providing the information to do so. Now that we know that the rest of France was not as poor as believed (something which is confirmed by the recent works of Leonardo Ridolfi and Judy Stephenson), we can more readily assess if the gap was “big enough” to matter.  If it was not big enough to matter, then we have to move to one of the other five channels that could confirm the HWE (at least that means I have more papers to write).

England circa 1700: low-wage or high-wage

A few months ago, I discussed the work of my friend (and fellow LSE graduate) Judy Stephenson on the “high-wage economy” of England during the 18th century. The high-wage argument basically states that high wages relative to capital incite management to find new techniques of production and that, as a result, the industrial revolution could be initiated. Its a crude summary (I am not doing it justice here), but its roughly accurate.

In her work, Judy basically indicated that the “high-wage economy” observed in the data was a statistical artifact. The wage rates historians have been using are not wage rates, they’re contract rates that include an overhead for contractors who hired the works. The wage rates were below the contract rates in an amplitude sufficient to damage the high-wage narrative.

A few days ago, Jane Humphries (who has been a great inspiration for Judy and whose work I have been discretely following for years) and Jacob Weisdorf came out with a new working paper on the issue that have reinforced my skepticism of the wages regarding England. A crude summary of Humphries and Weisdorf’s paper goes as such: preindustrial labor markets had search costs, workers were willing to sacrifice on the daily wage rate (lower w) in order to obtain steady employment (greater L) and thus the proper variable of interest is the wage paid on annual contracts.

While their results do not affect England’s relative position (it only affects the trend of living standards in England), it shows that there are flaws in the data. These flaws should give us pause before proposing a strong theory like the “high-wage economy” argument. Taken together, the work of Stephenson (whom I am told is officially forthcoming), Humphries and Weisdorf show the importance of doing data work as the new data may overturn some key pieces of research (maybe, I am not sure, there is some stuff worth testing).