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Tuesday, March 8, 2016

Minimum Wage, Maximum Automation

Fast Food Robots at a Franchise Near You

Hardee’s customers won’t have to deal with Hardee’s human employees much longer. The fast food franchise is experimenting with self-service kiosks at several of their restaurants, claiming, “The self-ordering kiosk gives the customer a fun, interactive and user-friendly way to control their order.”

This marketing blurb is obviously an exaggeration. There has never been a kiosk experience that was anything other than tolerable.

What these glorified iPads actually provide is a capital substitute for certain types of labor. Fast food restaurants are not exactly known for their sophistication in customer service and instead entice customers with speed, convenience, and consistency. Wages for fast food employees are in turn derived from the value workers add in these various capacities. The replacement of workers with kiosks signals that the value added by these services is most assuredly in decline.

It is the least productive workers who will first be replaced by machines.

The greater use of capital in a historically low-wage industry such as fast food represents a growing trend in response to recent attempts to raise the minimum wage to $15 an hour. If you are getting paid in excess of the value you create, you are either (a) a bureaucrat or (b) soon to find yourself replaced by a machine. This simple logic underscores the futility of all the recent attempts to coerce the market into paying labor more than the value it creates.

Simply put, legislation that increases the price of labor simultaneously increases the demand for labor’s substitutes. In this case, those substitutes are machines and the highly skilled workers that produce, maintain, and operate those machines. Put another way, a nationwide minimum wage will do more for Silicon Valley engineers than it will for struggling inner city youth.

Any econ student can tell you that people respond to incentives, yet it is the denial of this basic principle that underscores all the political effluent dumped onto the body politic each election cycle. Former presidential candidate Martin O’Malley says, “We need to stop taking advice from economists on Wall Street.” If Wall Street is not to his liking, perhaps he would listen to Alan B. Krueger, who served as chairman of the Council of Economic Advisors under President Obama. Writing in the New York Times, Krueger says:

Although the plight of low-wage workers is a national tragedy, the push for a nationwide $15 minimum wage strikes me as a risk not worth taking, especially because other tools, such as the earned-income tax credit, can be used in combination with a higher minimum wage to improve the livelihoods of low-wage workers.

As Hardee’s shows, the risk is real. Responding to a changing legal environment is costly, and Hardee’s had to spend time and resources developing this technology. While it may be tempting to view this as an investment in undermining the needs of workers, those who are hurt the worst are companies (along with their employees) that cannot spend their way around the problem. Not all businesses can so easily replace labor with technology. The unfortunate truth is that size matters, and in a hostile regulatory environment, small businesses are disproportionately harmed.

Fast food production may be denigrated as mere burger flipping, but looking behind the scenes, we see that a tremendous amount of machinery and technology are used to create the millions of meals sold every day. Nothing is stopping restaurants from grinding their own beef and making patties by hand. Nevertheless, by using a relatively more labor-intensive process, they are effectively being punished by legislation that increases the cost of labor without altering the value it adds to the production process.

A nationwide minimum wage will do more for Silicon Valley engineers than it will for struggling inner city youth.

The advantage of capital is that, with a large enough scale of operation, millions of dollars of investment can be turned into an outlay of pennies per unit sold. Thus, even though large businesses are often portrayed as the ones fighting the minimum wage, they are also the ones most readily capable of adapting to it. Economies of scale give them a disparate advantage against smaller competitors whose size limits their options in terms of capital substitutes.

The challenge facing employers and employees is to create value for their customers. No mere wave of a pen can magically increase the value that is created. The minimum wage perversely harms those it is intended to help, as it is the least productive workers who will first be replaced by machines.

  • Adam C. Smith is an assistant professor of economics and director of the Center for Free Market Studies at Johnson & Wales University. He is also a visiting scholar with the Regulatory Studies Center at George Washington University and coauthor of the forthcoming Bootleggers and Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics.
  • Stewart Dompe received his PhD in Economics from George Mason University. He has published articles in Econ Journal Watch and is a contributor to Homer Economicus: Using The Simpsons to Teach Economics. Follow him on Twitter @stewartdompe