Bill Gates On Minimum Wage Increases: He Only Got It Partially Right

Our time – which is marked in part by a sustained automation of low wage jobs – has given rise to a marked tension between the regulation of employment and technological innovation. 

Bill Gates reminded us of this tension late last month when he came out against raising the federal minimum wage.  Bill Gates: Raising Minimum Wage 'Does Cause Job Destruction' (CSN News, Jan. 21, 2014) (“If you raise the minimum wage, you're encouraging labor substitution, and you're going to go buy machines and automate things. . . .”).  Implicit in this observation is the understanding that, as minimum wages increase, non-labor alternatives (i.e. automation) become more attractive to employers.  Thus, a minimum wage increase on its own actually works against the low skilled workers an increase is designed to help.

The notion that a minimum wage increase alone can promote automation is no doubt true at the extreme.  Say for example Congress implemented a $100 per hour minimum wage this year.  That increase would throw labor markets into chaos.  For many businesses, automation would be the only way to survive the wage increase.  What Congress is considering now is not extreme.  Any link between the $2 minimum wage increase considered by Congress now and automation is as speculative as real.

Still, minimum wage increases make up but a fraction of the story.  Another incentive for automation is the totality of wage and employment regulation in this country.

For well over a century now, modern economies have steadily increased the regulation of employment and wages.  The laws are multi-faceted.  In California alone they span the Labor Code, the Health and Safety Code, the Business and Professions Code, the Revenue and Taxation Code, among many other codes.  This regulation of employment has accomplished real good.  It stopped the worst abuses of the industrial revolution (child labor and almost slave like working conditions), among other things and clearly improved the lives of millions of people in this country alone.

Yet today, the regulation of employment has become daunting and even sometimes downright scary to even well-intended, law abiding business owners.  Even technical violations of laws regulating employment can lead to liability for the payment of attorney’s fees, costs, and statutory penalties.  Misclassification as an independent contractor can result in devastating $25,000 penalties on small business.  Small oversights on check stubs can lead to legal exposure.  A supervisor’s awkward treatment of one employee can result in substantial exposure for discrimination.  One employee’s missed meal break can easily become a $5,000 mistake when factoring in the cost of defense and payment of the employee’s attorney’s fees.  It is not unfair to say that anytime a California employer takes on an employee, it assumes the unforgiving responsibility of near perfection in its administration and treatment of her. 

This is not to say that current laws do not protect against serious violation of people’s rights.  They do.  However, the technical edges of the labor and other employment-related codes capture many an objectively harmless violation in their juggernaut.

Perhaps it is a coincidence.  Or perhaps not.  California is at once the center of technological advances in automation while enacting arguably the most aggressive labor and wage laws in the country.  As employers, the startups and other companies working on automation in this state are surely aware of the known and unknown costs of employing people here.  Perhaps they become emboldened in their work every time they read about a settlement of large employment class actions.  Perhaps they smile when the California Legislature adopts or strengthens a section of the Labor Code. 

I cannot blame an employer who, in an attempt to limit legal exposure, finds ways of simplifying her business to reduce head count.  I cannot blame a restaurant chain for replacing wait staff with Ipads at each table if doing so reduces the risk of wage and hour lawsuits, a PAGA suit, reduces workers compensation premiums, or reduces the cost of compliance with any of the above rules.  An employer faces no legal exposure to an Ipad if the employer takes it out of service because of obsolescence.  A burger-flipping robot will not sue because a co-worker made a bawdy joke, the company accidently paid it a day late, or it missed a meal break.

Whether or not Bill Gates is right to link minimum wage increases on their own to the loss of low wage jobs, close regulation of employment certainly encourages it.  To that extent, those laws work against the very people they were intended to protect.

In fairness, other factors encourage automation too.  From the perspective of pure production capacity, machines often win over people.  A lack of suitable employees sometimes encourages it too.  Other human imperfections – if you can call them that – ranging between a need for rest, the diversion of attention, and other things makes automation desirable at some level.

Moreover, billions of dollars go into drone technology, robotics, computer miniaturization, and other technology of which this writer is unaware, each year for military purposes alone.  The technology has many secondary applications in the private sector. No freeze on minimum wages or revision of modern employment and wage laws will stop these advances in technology.

Yet, the existence of other factors in the mix takes nothing from the correlation between overly aggressive employment regulation and automation. 

Bill Gates last month did not touch on what happens when the bottom of the wage structure comes under pressure from automation.  Other people recently have.  The French economist and best selling author Thomas Piketty has received substantial attention over the last 18 months for his reflections on the state of modern economies.  In his best-selling book Capital in the 21st Century, Picketty demonstrates a disparity between the value of labor and value of capital.  The rate of return of capital exceeded the rate of return on labor in 2010 for the first time since the 1920s.

Piketty’s observations on the disparity in value between labor and capital suggest that the standard of living for ordinary people is declining rather than increasing.  They suggest that wealth disparities are likely to grow as people who own assets grow even wealthier from those assets specifically through labor saving efficiencies. 

Piketty’s work suggests an inverse correlation between regulation and the value of thing regulated.  Here, capital assets, largely being unregulated, are valuable.  The value of human assets, being highly regulated, are now in decline. 

Over the coming decades, policy makers will come under increasing pressure to do something to help larger percentages of the population workers who become displaced through automation.  

Incremental increases in the regulation of employment are not the answer.  Increases over the last few decades have done little to nothing to improve the lives of ordinary people.  If anything, trying too hard to protect ordinary people through wage and employment laws has fueled automation at the expense of ordinary people’s wages. 

Piketty’s work however does point to other viable solutions to our low wage conundrum.  While employment laws have received too much attention from policymakers, the regulation of working assets has received too little attention from them.  The burden of alleviating social ills can and should be shared by working capital assets.  Placing the burden of regulation and taxation on working capital assets will reduce their value while simultaneously increasing the value of human capital assets.

As a society, we firmly believe that success is available to those who work hard or intelligently no matter what resources their parents may have blessed them with.  Yet, this equality of opportunities is perhaps under the greatest threat it has ever faced.  It is now time for policymakers  to deal with wage disparity in ways that do not, as an unintended consequence, further diminish the value of human assets.