January 22, 2018

Minimum Wage, Amazon Go and Widening Wealth Disparity

The fight for a higher minimum wage is happening around the world.

Just this month, the Ontario provincial government in Canada raised the minimum wage to $14/hr. Next year it will raise the minimum wage to $15/hr.

In a world where the average CEO has already made more this month than the average worker will make in a year, the rhetoric is appealing: fairness for all, a living wage, poverty reduction, and so on.

I'm all for fairness, but I fear that the rising cost to hire low-skilled workers will end up harming them more than it helps them. Indeed, the wealth inequality gap may even be widened by a higher minimum wage.

I admit this is counter-intuitive, but hear me out.

Businesses exist to make a profit. Without profit to adequately compensate for putting capital at risk, capital would never be risked. Alternatively, capital would move to other investments that do appropriately compensate for risk.

Given that premise, the last place the money to pay for higher labor costs will come from is profits. A business-person will always pay for higher per-hour labor costs by either reducing the units of required labor or by raising prices.

On Saturday, I visited my local pizza joint and spoke to the owner. Due to the increase in minimum wage, his monthly labor costs have increased by $2500. How is he paying for that? He is personally working two more days per week, reducing the need for hired labor. In the end, his staff receives a higher wage, but fewer hours.

Other businesses - in one way or another - are doing the same thing. Essentially, they are finding ways to keep labor costs steady, despite the increase in hourly costs. So they're reducing the number of hours or cutting perks.

Eventually, my friend at the pizza place might not want to work those extra two days. Over time, he will gradually raise prices to compensate so he can again pay someone else to cover those shifts.

Ultimately, his staff first come out even (by seeing their hours cut while receiving more per hour) but may then benefit from a higher minimum wage as the shock of labor costs is absorbed by gradual price increases and their hours are increased.

In the end, many times a higher minimum wage is passed on to consumers while output remains constant. In other words, a higher minimum wage simply creates inflation - hourly wages are higher, but so is the cost of everything.

While this might sound relatively innocuous, the noise surrounding minimum wages is probably coming at the worst possible time. We are at the precipice for low-skilled jobs. AI, machine learning, data availability and technological adoption are converging to destroy the low-wage service sector.

Have you been to a McDonalds lately? They have giant touch screen ordering tablets a mere 10 feet from the cashiers they will eventually replace. Grocery stores and pharmacies are replacing cashiers with self-serve checkout counters.

But this is nothing.

Today, Amazon launched it's new brick-and-mortar grocery store: Amazon Go.

While staff is required for certain duties at the Amazon Go store, there are no cashiers OR giant tablets. The technology exists to simply grab and go, automatically paying through an Amazon account.

I don't expect Amazon Go to be bug-free. But this is the future of low-margin, high turnover retail. Looking from the outside-in, one couldn't be blamed for assuming this entire technological exercise is to eliminate the cashier job from society. This may be true, but it goes far beyond the checkout counter.

Will any low-skilled manufacturing or driving jobs exist in 5-10 years? If history is any indicator, the answer is 'yes, but very few'. America has lost 5 million manufacturing jobs since 2000, due to a combination of offshoring and automation. Cost has historically been the biggest factor in the decision to change staffing models, and it will continue to be so.

In the end, upward pressure on wages will accelerate the shift to automation across many industries, leaving low-skilled employees in the dust. Moreover, with the further decimation of the working class strata - in the name of corporate profits - wealth disparity between the bourgeoisie and proletariat will continue to worsen.

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