Minimum Wage Wars
Comment of the Day

July 28 2015

Commentary by Eoin Treacy

Minimum Wage Wars

Thanks to a subscriber for this article by Sydney Williams at Monness, Crespi, Hardt & Co., Inc which may be of interest. Here is a section:


The numbers suggest that a large percentage of minimum wage jobs are the teen-age children of middle class and upper-income families. Many of the rest are starter jobs – the kind we all remember when first we went to work. Estimates are that an increase in the minimum wage to $15 per hour will cost 500,000 jobs. I suspect it may be more.

Technology has already replaced many service-sector jobs. In some restaurants, one can order on I-Pads. Technology has replaced many secretarial jobs. The internet has made it easier to form a corporation and it has reduced the time for research. Travel agents have become an endangered species. The President has suggested that the servicing of smaller 401K and IRA accounts should be automated. Three weeks ago, when my wife was recovering from a fall, robots delivered medicines to her hospital floor. Technology will continue to replace jobs. It is one reason why STEM jobs have been the best paying for recent college graduates. David Brooks wrote recently in the New York Times: “If you raise the price on a worker, employers will hire fewer and you’ll end up hurting the people you meant to help.”

When New York Governor Andrew Cuomo signaled his support for the higher minimum wage, he disingenuously said: “You cannot live and support a family of four on $18,000 a year in the state of New York.” (The State of New York’s minimum wage is $8.75 per hour.) His statement was purely political, as were similar endorsements from Hillary Clinton, Bernie Sanders and Martin O’Malley. There are few families of four dependent on a sole provider making the minimum wage. Those jobs, as I wrote, are mostly held by the young – teenagers or young people starting a career. It is jobs, not raising the minimum wage that will help the poor. Raising the minimum wage will not narrow the income gap. It will cost jobs and force some businesses to close. It is not the panacea it is claimed and it detracts from the real task – job creation.

Eoin Treacy's view

I went to visit a sewing factory in the San Fernando Valley a few weeks ago. They have 15 workers and specialise in sewing which is still almost all done by hand. This is true of the industry globally. The garment industry is people intensive and wages are about $10 an hour which is above the minimum wage but less than the $15 that will need to be paid in Los Angeles County from 2018. The company survives by doing small runs for singers and YouTube stars who need the work done fast and have high margins. Los Angeles has a large garment district and there are a lot of factories. 

Now let’s consider the fate of these factories with higher labour costs. Garment production is already an idiosyncratic business when the vast majority of the global sector migrates to the country with the lowest wages. Softwear Automation Inc. is beta testing a robot that will displace workers in the garment sector. It’s not in the market yet but if this company does not succeed another one will. Instead of having one worker per sewing machine you might have an operative running an alley of machines. This means it will be possible to have factories closer to the end consumer because productivity will justify it, but the number of manufacturing workers may be less and those workers will need to be more skilled. 

Jobs where you do not need to use your brain are becoming increasingly scarce. Attempts to drive wages higher are likely to be counterproductive if they do not result in a commensurate improvement in aggregate productivity. Creativity, ingenuity and initiative have their just rewards and are going to be even more prized as automation progresses. Personal responsibility to adapt, lifelong education and proactivity will be essential for even the lowest skilled jobs as the rollout of technology progresses. 

This is even more important for countries that rely on low cost labour manufacturing to employ vast numbers of people. Increasing domestic demand for the products they manufacture and enhancing productivity per worker will be more important than ever as technology innovates. Governance really is Everything!


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