Proponents of a federal $15 minimum wage like progressive Senator Bernie Sanders argue that it would lift millions of workers out of poverty. But the former CEO of McDonald’s just warned that artificially spiking the cost of labor could hasten the drive toward automation and instead leave many workers replaced with machines.
“They’re going to force the cost of labor up, which means it’s going to force management to find alternatives, which means they’re going to lose jobs,” Ed Rensi told Fox Business.
The former executive said that while mandating higher wages might sound great at first glance, companies like McDonald’s would respond either by hiking prices or finding ways to cut costs, such as increased automation.
Per Fox, Rensi argued that “consumers will ultimately end up carrying the costs associated with the wage hike, and that the push toward automation is aimed at maintaining the convenience and speed of fast food. He also warned that automation will allow ‘institutional big guys’ to take over the industry at the expense of small business.”
Indeed, economic research has shown that McDonald’s across the country have raised prices to offset nearly all the costs associated with past minimum wage hikes. Basically, average people were no better off. At some point, if they are unable to keep raising prices, stores will instead be incentivized to start aggressively pursuing automation and cutting current workers out of the picture.
McDonald’s is already exploring this strategy. It is testing new automated voice-ordering technology at 10 Chicago restaurants, so far boasting an 85 percent accuracy rate, with staff needing to assist on just 1 in 5 orders. Artificially spiking labor costs through government mandates will only accelerate this trend.
Of course, there’s nothing inherently wrong with automation or the development of new technologies. At least, not when they come from the natural process of improved productivity in a competitive market. After all, we’re all better off that the automobile industry displaced and “automated” the horse-drawn carriage industry.
The problem emerges when the government puts its thumb on the scale.
Business owners, like all rational actors in our economy, make decisions “on the margin.” They look at the cost of one extra employee, one extra hour of labor, etc., and weigh it against the benefit of that employee, hour, or so on. If the benefit outweighs the cost, they pursue the option—if it doesn’t, they don’t. Yet when the government artificially meddles with the costs and benefits—through arbitrarily spiking labor costs, for example—then businesses end up making different decisions. When it comes to automating labor, that’s a recipe for premature unemployment.
To be clear, the acceleration of automation is not the main consequence of misguided minimum wage hikes. The foremost consequences are direct job losses and price hikes that erode any gains.
But because minimum wage laws artificially alter the incentives employers face, they do encourage a premature shift to automation. And no matter how much progressives like Bernie Sanders wish it weren’t so, workers replaced by a screen won’t be better off.
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Brad Polumbo (@Brad_Polumbo) is a libertarian-conservative journalist and Policy Correspondent at the Foundation for Economic Education.
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