Gradually but relentlessly, the minimum wage is going up in many parts of the country, including major cities and large states such as California and New York. A higher mandated minimum wage for the nation as a whole appears likely. On the Democratic side, the candidates are promising to boost it as high as $15 an hour, or more than double its current level.
Barack Obama, meanwhile, issued a directive requiring salaried workers earning less than $47,476 a year to be paid overtime when they put in more than 40 hours a week, on par with hourly employees. Whether they get overtime pay or raises to place them beyond the upper limit of the new rule, their incomes will rise — and so will the cost to their employers.
Predictably, economists have crossed swords over the economic impact of government-mandated wage increases. That there is no consensus among economists — and politicians who listen to them — should come as no surprise. Opinions tend to reflect ideological orientation much more than any “objective” economic analysis. Thus, conservative Republicans insist that such wage hikes distort the market, kill employment and spur illegal immigration. Democrats, on the contrary, believe that higher wages will lift all boats, boost GDP and, ultimately, create new jobs.
There is also the issue of fairness. The minimum wage has not kept up with inflation: when measured in current dollars, it peaked at over $10 sometime in the late 1960s and was higher than it is today into the 1970s.
However, neither economic efficiency nor equity is what makes raising wages such a burning political issue. Until this election cycle, Americans seemed generally content with the way things were in the economy. Protests have been limited to the Tea Party on the right and Occupy Wall Street on the left, neither of which has morphed into a major movement. There have been no major strikes, and private sector unions remain moribund.
Election 2016 has changed all that. It revealed the severe discontent and deep resentment lurking just below the surface of America’s social peace. Ordinary Americans are mad at the political establishment, the greedy elites, the finance sector and the corporate world. Having grown up in what they knew was the richest, most powerful nation in history, they don’t understand why they can no longer earn a living wage. Why instead of holding one secure, well-paid manufacturing job the way their fathers did, they are forced to work three demeaning part-time service jobs — and worry about losing them into the bargain. Why in the previous generation one worker supported the entire family while now mothers are working full-time and yet the family’s standard of living is much lower. Why so many people around the world are visibly wealthier than them and have better, richer, more rewarding lives.
These are valid questions. In a quiet way, the American electorate is in turmoil. All too many are showing themselves willing to overthrow the status quo and opt for radical solutions offered by unconventional candidates. In this year’s primaries, a majority of voters have cast their ballots against the existing economic and political system and for a revolution, either from the left or from the right. While financial markets are either oblivious to the mood of the electorate or are betting that the old order will somehow prevail, it is nevertheless true that in a democracy, a stable economy probably can’t coexist with so much popular discontent.
Obama’s directive on overtime pay will impact 4.2 million salaried employees. Another 3.3 million earn minimum wage or less. Together, this represents only 5% of employed Americans. However, if Hillary Clinton, the only remaining establishment candidate, wins in November, she has vowed to raise the minimum wage to $12 an hour and may even opt for a hike to $15. This will impact tens of millions of workers and most businesses, and alter in a major way the structure of the U.S. labor market.
The problem is that this move, however well-meaning, may prove counterproductive and give further impetus to the technological revolution already sweeping the labor market. The writing on the wall is clear: the labor market is increasingly controlled by technology, which automates a growing number of processes (not only menial but ones requiring considerable brainpower, too) and eliminates many current jobs, while creating very few in return. The choice is stark: wages will have to go progressively lower or jobs will be replaced by machines.
The labor market currently mirrors the processes that occurred in the oil market over the previous decade and a half. The experience of the 1970s already showed that high oil prices spurred technological advances that increased the supply of oil and boosted energy efficiency. Worse, technological progress is a one-way street. More efficient engines, lighter materials, energy-saving light bulbs, etc., once invented can’t be undone. Similarly, new production and exploration technologies allowing oil to be extracted from shale and from the ocean floor don’t disappear; nor do advances in renewable energy. The higher the price, the more money goes into technological progress.
What was only dimly understood back in the 1970s has become self-evident after the technological and entrepreneurial revolution of the late 20th century. The period of historically high oil prices in 2010–14, when a barrel averaged above $100, led to a quiet coup in the oil market. Producers lost control over oil prices to technology providers. The result has been, first of all, that oil prices are now under relentless downward pressure and, secondly, that an increasing proportion of what is paid for a barrel of oil goes to owners of technology.
The labor market is going through a similar process. Early successes in robotics were achieved in Japan, where the population was aging and a labor shortage loomed. Just as in oil, new technology quickly spread to other countries, so that robotics is now an integral part of the overall technological revolution. Much U.S. industry is going through on-shoring — a return of production from China, Mexico and elsewhere to the U.S. However, the jobs that left a decade or two ago are not coming back. The U.S. automotive industry, for example, is firing on all cylinders, with record numbers of vehicles being purchased by American drivers, but employment in the industry remains almost as low as when it was on the ropes.
A decade ago, before the 2008 financial crisis, manufacturing jobs made up 10.4% of total employment, already a historic low, They measure just 8.5% now. Over the past 12 months, with the economy recovering fast enough to warrant a monetary tightening, the number of manufacturing jobs has actually declined.
That robots and other forms of automation are taking over manufacturing jobs is old hat. But technology is moving into other spheres, as well. Thus, it has already transformed the face of retail trade. From 2000 to 2016, retail’s share of total employment fell from 12% to 11% — which represents 1.5 million retail jobs, about 10% of the total. Retailers are reeling from the Amazon effect, which combines convenience with low prices, achieved by the use of the Internet and warehouse automation. Most Amazon orders are filled without any human input, so that brick-and-mortar discounters are forced to introduce self-service checkout and automate backroom processes. Meanwhile, Amazon is working on automating delivery, as well.
Other kinds of jobs are on their way out, as well. There is no reason for a human to cut your hair or to cut grass and blow leaves on your property. Long security lines at U.S. airports can be reduced or eliminated not by hiring 6,000 screeners, as the TSA workers’ union proposes, but by automating the screening process, for which adequate technology already exists. It would save money and improve security, too.
We have been conditioned to think that business investment is a good thing. So good in fact that the government provides tax and other incentives to companies buying more equipment or spending their profits on R&D. Of course when a company builds a new plant, it increases employment and broadens the tax base. Research creates new products and boosts productivity, which also grows the economy.
But it doesn’t always work like that anymore. By installing self-service checkout counters, Home Depot stores or CVS pharmacies actually shrink the tax base, depriving dozens of workers of a paycheck. Meanwhile, a number of companies are racing to build a self-driving car. Such cars may not hit city streets for a while, but self-driving trucks may be on the highways before the end of the decade. The next president may watch 3.5 million professional truck drivers — men and women who make a decent living and in many cases possess no other marketable skills — lose their livelihood for good.
The industrial revolution created machines to aid humans in their work and make it more productive. The IT revolution has been replacing humans in menial and low-skilled jobs. The next stage, artificial intelligence, will supplant humans in more and more sophisticated jobs as it gathers momentum.
Raising the minimum wage will simply accelerate the process that is going on regardless. It is yesterday’s solution to today’s problems, and a false solution as well. A more comprehensive search will have to go on to figure out how to reconcile a rising supply of labor with falling demand. It is a problem for which Milton Friedman’s free market theories don’t have an answer any more than traditional liberal remedies do. If there is no solution, however, it is likely that discontent with the economic system will grow and deepen, and impact more and more Americans, with unpredictable consequences for the country’s political system as well.