TECHNOLOGICAL CHANGE AND THE LABOUR MARKET: Higher pay encourages automation of low-wage jobs – but new employment opportunities emerge for those workers

07 Jan 2019

Higher costs of employing staff in low-wage occupations expedite the automation of those jobs that involve routine cognitive tasks. But unlike the automation of middle-income occupations, low-wage automation is not nearly as costly for individual workers since there is offsetting growth in the availability of similarly paid jobs. For example, the introduction of self-scanners in retail outlets replaces cashiers but creates new jobs that require workers to assist or monitor customer usage with the technology.

These are the central findings of research by Daniel Aaronson and Brian Phelan, which is published in the January 2019 edition of The Economic Journal. Their study analyses the impact of changes in US minimum wage laws using occupation-level employment and task data from the US Department of Labor, as well as data from the US Current Population Survey.

The extent to which firms can substitute labour with technology is a longstanding question that has grown in policy importance as automation technology spreads to a larger range of jobs. The new study contributes to this important issue by quantifying the potential to automate the low-wage labour market, which is primarily composed of low-skill service sector jobs.

Analysing changes in US minimum wage laws between 1999 and 2009, the researchers find that higher labour costs arising from minimum wage hikes expedite technological substitution in low-wage occupations that are especially intensive in routine cognitive tasks, such as cashiers.

But the loss of such jobs is largely offset by employment growth in other similarly paid jobs – primarily low-wage occupations intensive in non-routine interpersonal tasks. Thus, the total short-run impact of automation on low-wage employment may be economically small even when technological substitution is taking place.

To explain their results, the researchers propose a simple theoretical framework, which assumes that the introduction of automation technology in the low-wage service sector replaces jobs intensive in routine cognitive tasks but requires additional non-routine labour in order to be productive.

In such a setting, technological substitution stemming from a minimum wage hike will be characterised by falling employment in highly routine low-wage jobs. But the total short-run employment effect is ambiguous due to the increased usage of non-routine positions.

Using occupation-level employment and task data from the US Department of Labor, the study shows that minimum wage hikes decrease employment in occupations that typically require a larger proportion of time spent on routine cognitive tasks.

To take one striking implication, the estimates imply that a 10% increase in the minimum wage is associated with a 2.3% decline in employment among cashiers, an occupation with an especially high proportion of time spent on routine cognitive tasks, but no measurable change in employment among food preparation workers, which involves an average proportion of time on routine cognitive tasks.

By contrast, there is no evidence of a differential employment response based on the extent to which an occupation is manually routine.  The researchers also show that overseas outsourcing cannot explain this broad set of results.

They see similar effects when examining the experiences of individuals in the US Current Population Survey. Minimum wage hikes cause individuals to move to occupations with fewer routine cognitive tasks. Moreover, the cost of this reallocation on individual workers appears to be relatively small with mildly lower probabilities of subsequent employment but lower wages compared with otherwise similar low-wage workers.

Of course, that need not be the case in periods outside the study’s sample window or in the long run, where there is stronger evidence that minimum wages have larger effects in reducing employment.

Wage Shocks and the Technological Substitution of Low-Wage Jobs’ by Daniel Aaronson and Brian Phelan published in the January 2019 issue of the Economic Journal.

Daniel Aaronson

Federal Reserve Bank of Chicago | daaronson@frbchi.org

Brian Phelan

DePaul University | bphelan2@depaul.edu