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The Effect of Minimum Wage on Automation Investment

Taylor Davis, Lucas Candella, Jake Gordon and Dylan Engel

Sponsors: Dr. John David Burger and Dr. Jeremy Schwartz

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Worldwide Sales of Industrial Robots (in 1,000 units)

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The Current State of Automation

Automation and Advanced Economies (2017; Harvard Business Review)

Aging workforce

Automation provides a necessary “boost” in productivity
Essential to meeting long-run growth projections; would otherwise experience trouble reaching goals

45.8% of US work activities could be automated

Robots and Jobs (2017; Acemoglu, Restrepo)

One more robot per thousand workers

Reduces employment to population ratio .18 - .34% points
Reduces wages .25 - .50% points

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Jobless Recoveries & Recession

Economic evidence supports that automation has an impact on employment and economic recoveries
Burger & Schwartz (2017)*

Recessions: ‘90-’91, ‘01-’02, ‘07-’09
Globalization & Technology have a role in these outcomes

Autor & Dorn (2015)

Hypothesis: wage polarization stems from falling automation costs
Middle-skill jobs disproportionately cut

less incentive for firms to rehire as technology becomes cheaper and wages demanded increase

Evidence: Computerization erodes wages on low-skill workers, forcing it to be reallocated elsewhere

Each of the last three recessions have been followed by slower than normal recoveries and extended periods of unemployment (Lucas)

Why?

Globalization: firms incentivized to seek cheaper alternatives globally (outsourcing)
Technology

During recessions, firms cut costs and become “lean” this involves less employees and doing more with less.

Autor & Dorn (2013)

They cite technological change may be a reason for these jobless recoveries
Hypothesized that wage polarization could be signaled to the falling cost of automating routine jobs
Middle-skill jobs show evidence to be disproportionaly slashed during recessions and replaced by automation
Therefore firms have less of a need to rehire during the following expansion
One of their calculations concluded that computerization erodes wage paid to routine tasks for low-skill workers. However, their labor is reallocated some place else

Sources:

Burger and Schwartz Paper
Autor and Dorn Paper

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Labor Force Participation vs. Tech Pulse

San Francisco Tech Pulse

“The Tech Pulse Index is an index of coincident indicators of activity in the U.S. information technology sector. It can be interpreted as a summary statistic that tracks the health of the tech sector in a timely manner. The indicators used to compute the index are investment in IT goods, consumption of personal computers and software, employment in the IT sector, as well as industrial production of and shipments by the technology sector. The index extracts the common trend that drives these series.” (San Francisco Fed)

As previously mentioned, each of the past three recessions has followed with jobless recoveries

Our research seeks to discover why this is?
Our play is that it has to do with automation and technology investment IN ADDITION to rising state wages for low-wage/skill jobs
This graph suggests we are on the right track.

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Economic Framework: Solow Model

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Manufacturing Sector Data- A Case Study

Manufacturing sector is known for automation

Industrial robotics sales have grown exponentially since 2000

There are two notable sector trends over the past few decades:

Employment has rapidly decreased, especially during and after recessions
Productivity has continually increased

Employment in this sector, especially routine employment, has a negative correlation with minimum wage hikes
From this we can make the assumption that the manufacturing sector is experiencing jobless recoveries on account of increased labor costs and relatively lower costs to automate.

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Manufacturing Sector Employment and Industrial Production since 1972

(Dylan)

Prior to the 1990s, employment in the manufacturing sector was relatively stable with employment falling only in recessionary periods

Following the recession in 90/91, the jobless recovery phenomenon can be observed

Employment has fallen in this sector rapidly during every recession since, and even in expansionary times it has continued to fall, never reaching the employment level of pre-recession.

In the media, politics, etc, we have been exposed to the idea of the US’s decline in manufacturing employment, especially among low skilled workers.

DESPITE THIS TREND the overall productivity of the manufacturing sector has grown substantially in the same time employment has fallen to historic lows.

This brings to question if the workers left in the industry are more productive or has technology replaced and augmented the production of workers.

Burger and Schwartz who have studied jobless recoveries among other economists like David Autor lean towards it being likely that automation and technology can be accredited to this production

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Industrial Production Forecasts

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Manufacturing Employment Forecast

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Manufacturing Sector Employment & Federal Minimum Wage (Nominal) since 1972

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Conclusion

Automation is the present and our future, important to study its’ impact so workers are not dislocated
Our analysis suggests:

There is a negative correlation between federal minimum wage (FMW) and manufacturing sector employment

Each nominal $1 increase in FMW→ decreases manufacturing sector employment by approx 864k
Following subsequent recessions, we expect 787k jobs to be permanently lost

Re-allocation of capital towards technological investment/improvement