Minimum wage boost path to prosperity?

Can minimum wages improve productivity and innovation over the long run?

Usually, it’s detractors of the minimum wage who talk about the long term. Minimum-wage hikes tend to have only small or negligible effects on employment levels, but critics of setting pay floors have said that they slow long-term employment growth.

But I’m now thinking about the even longer term, and about the effect of minimum wages on productivity rather than employment.

In the long term, productivity comes from technology. Economists often treat technology as if it just appears out of nowhere, but in fact it comes from the innovative efforts of companies and researchers.

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In the past, when companies implemented labor-saving technology – whether assembly lines or computers – their workers didn’t simply go on the unemployment rolls. They became more productive and commanded higher wages.

In the past, automation has always complemented human beings instead of making them irrelevant. That might change in the future, but so far the old pattern is still holding.

For workers to become more productive in order to take advantage of new technologies, they often have to improve their skills. Workers have always been able to do this quite successfully.

So minimum wage laws, by forcing us to abandon low-skilled labor, might actually increase technological innovation. Some people even speculate that this effect might have started the Industrial Revolution.

Economic historian Robert Allen has argued that the Industrial Revolution began in Europe, rather than in China, because European employers were forced to pay more for labor. A 1987 theory by growth-economics pioneer Paul Romer operated on a similar principle – expensive labor causes an upward spiral of technological improvement.

So in the very long term, minimum wage laws might force companies to do what they otherwise wouldn’t do – make risky bets on new technologies. And as workers raise their own skill levels, that new technology would raise their wages as well.

It’s a potential benefit of the minimum wage that is worth thinking about. •

Noah Smith is an assistant professor of finance at Stony Brook University and a Bloomberg View columnist.

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