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Another Note on the Minimum Wage

Ronald Warrick offered the following comment on this earlier post:

Several libertarians economists are making the case that automation does not increase unemployment, it just leads to higher productivity and prosperity. If that is the case, it shouldn’t matter to much of anyone that some jobs are automatable.

Here’s my response:

I’m afraid that you do not understand the argument. You confuse cause with effect. Automation driven by changes in relative scarcities – especially the increasing scarcity of labor – does not cause long-term unemployment; automation driven by artificial increases in wages – increases that do not reflect an increase in the scarcity of labor – does cause long-term unemployment.

When labor becomes more scarce relative to the demand for labor, labor becomes more valuable ‘at the margin.’  The chief consequence is that wages rise.  One result, in turn, of this rise in wages is an intensification of producers’ efforts to create ways to substitute non-human inputs for human inputs in production processes (and of producers’ willingness to switch to other, existing means of substituting non-human inputs for human inputs – means that were previously available but too costly to use relative to using labor).  Such wage increases both ‘tell’ producers that labor is now more scarce and give producers incentives to economize further on labor.

In stark contrast, a rise in the minimum wage is a lie.  This rise in wages does not reflect any increased scarcity of labor relative to the demand for labor.  A rise in the minimum wage is a false report – faulty information – perjury – inflicted on markets.  Producers react to rises in minimum wages in the same way that they react to rises in wages caused by genuine increases in the scarcity of labor – including, of course, greater efforts to replace labor with machines and other non-labor inputs.  But because there is no actual increase in the scarcity of labor, hikes in the minimum wage reduce the employment prospects of low-skilled workers.