Morning Thoughts on Minimum Wage and Peak Jobs

February 16, 2013

There has been ado about President Obama’s move to increase the minimum wage to $9.00 an hour. In my freshman year economics classes at Worcester Polytechnic Institute I was taught that most economists agreed that having a minimum wage at all was a bad idea because employers will hire fewer people. However this post at Wonk Blog explains that there are some dissenting opinions. My general sense is that most companies are already paying above the minimum wage (at least in Connecticut) because workers will not accept less. For most companies the minimum wage is still too low to be consequential to their bottom line. For the rest of companies that are going to lay off employees or can no longer hire new workers, they are staring at a tipping point of profitability already and if it isn’t the minimum wage that is going to knock it out of business then it will be rising commodity prices or tax and insurance costs.

There has been a lot of chatter in the news and economic circles about robots and peak jobs. I think that this concern is overblown. A lot of labor demand is not being filled because of lack of capital. There are plenty of jobs where computers and robots do not function as well as people. You can see this whenever you call a customer service line somewhere and are faced with a robot and a long hold time, or the long lines at the DMV. I do not think most people would accept a robot bartender or waiter in a restaurant. Robots certainly cannot litigate in a courtroom, fill a cavity, or install carpeting. Furthermore technology is opening up new areas of opportunity for unskilled work in things like data entry. There is a huge collection of government records in the Connecticut State Library that have not been digitized and need to be accessed manually. Even certain recent years of the Hartford Courant are not available digitally.

There are a few reasons that I think labor demand in these areas is not being filled. The first is that corporations have temporarily suspended operating with longterm vision in order to fulfill short-term needs. For example as a recent law graduate I have been searching for jobs at firms. Most firms are not willing to hire recent graduates but have plenty of budget to hire experienced attorneys. Instead of paying recent graduates less and training them up, they are paying existing attorneys market rate. Eventually the supply of experienced attorneys will dwindle to the point that it is no longer cost-effective and companies will have to pay to train new attorneys. In the long-term it is better to make a super-star then to hire one.

Despite Republican claims of taxes being too high, government employment in areas like the judicial branch is too low. The court houses are forced to triage the cases and things like patent litigation takes years. This has introduced uncertainty into the economy and created economic loss in the technology sector as companies have chosen to settle their patent cases instead of litigate them. Connecticut specifically has documented issues in administration at the Department of Social Services, and I do not think anyone would dispute that long lines at the DMV create a net economic loss for the economy.

A lot of economic cost is being caused by energy, pensions, and healthcare. In the case of energy the rising cost of electricity and oil have driven up the prices of almost everything. We may see a dip as natural gas supply continues to expand but otherwise we need to continue to focus on becoming more energy-efficient. The United States has failed to innovate its way to cost savings in healthcare. I think this is in part riding on the rising cost of education (which is also a bubble). Doctors need to make good money to pay off their loans. Hans Rosling also explained why a single payer system might help us tackle this issue. Pensions are the toughest of these problems because employers made a promise and then failed to prepare to pay on it. Now we are paying more than we would have otherwise. As a general matter it is poor policy to renege on pension commitments. I think it might be worth companies or governments offering to buy people out of pensions at a discount. Troubled companies or pensions might be able to negotiate benefit reductions because they otherwise would fail or default. Otherwise I am unsure what can be done to tackle that issue.

Ultimately the important thing is to continue to invest in things that create economic productivity today so that tomorrow is more prosperous. Much of the austerity we are practicing is penny-wise and pound-foolish. There is no reason to fear change or innovation, but failing to adapt and invest is why we lack jobs.

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