Understanding the Impact of Robots on Employment — Part 3
By Siddharth Singh, 2nd June, 2015
What should the ideal minimum wage be?
While some free market advocates* argue that there should be no minimum wage at all as it distorts the labour markets (therefore creating unemployment), only the disingenuous would ignore the power angle in labour relations which has historically led to absurdly low wages in several industries and regions, where even 70 hours of work a week cannot afford a dignified life. In this series, I’ll avoid the debate on whether there should be any minimum wage at all, and instead delve on trends which influence the appropriate level of the minimum wage (it could be zero too, if there the state provides adequate level of social security).
Surely, any minimum wage must be high enough to ensure adequate nourishment, a roof over the head, access to healthcare, some minimum level of education, and then some. Of course, if the minimum wages were too high, firms would employ far fewer employees, which would lead to underemployment — and therefore greater inequality among the lowest income classes.
High minimum wages also lead to greater prices of goods, which again come back to bite the poor. An illustration of this is the presence of NREGA in India: this employment programme in rural areas enforced a minimum wage that was far higher than the going wages in many regions. This led to workers demanding more from other employers, such as farmers. In turn, agricultural prices (among prices of other products) rose, which fed into the high inflation levels in India over the past few years (this has been recognised as a contributing factor by the Reserve Bank of India).
A variable influencing minimum wages that is of growing importance today is the substitution of human labour by automation. Owing to advancements in science and technology, automation today is cheaper and more useful today than it ever was, which is leading to far greater adoption by industries. It is — in several cases — cheaper to let robots do repetitive tasks than to hire humans to do the same. (Although automation is beginning to consume white collar jobs too, as we saw in Part 2 of this series).
In such a scenario, what would happen if minimum wages were higher than the cost of adoption of robots? What if the minimum wages were already low — or non existent — and robots were cheaper to employ still? There are other expenses that are made by companies which influence the substitution with automation — such as healthcare of employees, or retirement fund contributions. (On an aside, companies referring to salaries as ‘Cost to Company’ always gets my goat. Show some respect to your employees, and stop implying they are a burden on the company).
There are other implications of the cost of labour: it influences where labour-intensive manufacturing takes place. The Economist in its 2015 Q2 Technology Quarterly provided a relevant illustration:
“While many manufacturing processes have been automated, stitching together garments remains a job for millions of people around the world. As with most labour-intensive tasks, much of the work has migrated to low-wage countries, especially in Asia. Factory conditions can be gruelling. As nations develop and wages rise, the trade moves on to the next cheapest location: from China, to Bangladesh and, now that it is opening up, Myanmar. Could that migration be about to end with the development of a robotic sewing machine?”
The answer may be in the affirmative, as the article argues.
“The lesson from industrial automation in other sorts of factories, though, shows that robots keep getting better and cheaper. It may be a while coming, but the writing seems to be on the wall for sweatshops.”
…sweatshops which employ people (who, perhaps appropriately, are referred to as ‘Moist Robots’ by Dilbert’s Scott Adams).
So will we then see manufacturing move back to advanced economies, away from developing countries in Asia? Perhaps. Will minimum wages see increasing downwards pressure from the threat of automation? Perhaps, although the impact could be the other way for those fortunate to still be employed in positions were the option of automation is available.
Foot note:
*= Personally, I prefer calling myself anti-market failure rather than pro-free market. Market structures prove to be better platforms than tightly controlled economies to ensure reasonably rational allocation of resources, however, markets often (very often) fail. Fair regulation and objective governance can prevent market failures (such as negative externalities, inadequate supply of public goods, monopoly practices, etc).
The author is on Twitter @siddharth3
