Minimum wage increase will have unintended consequences

“Everything old is new again.”

That title line, from a song by Peter Allen, turns out to be prophetic.

A 1960s debate about economics certainly qualifies as old. At that time there were serious discussions going on about the future of economics. The issues were the effectiveness of government interventions in markets and whether or not predictions were an important part of economics.

There was no declared “winner” of the discussions, but the interveners and the predictors eventually had their way. the economics curriculum has become considerably more “mathy” to the point where today advanced mathematics is the dominant feature of the science. The economics curriculum emphasizes econometrics and other mathematical modeling techniques supporting predictions and economists make a lot of them.

At the same time, fate, and the inability of the Congress to control its spending, eroded fiscal policy interventions, and we were left with monetary policy and the Federal Reserve to carry the full weight of economic policy.

The discussions are now a half-century old and still unresolved. And they are new again because of repeated failures of economics to forecast important, large scale economic events. Somehow, with all our predictions, we in the economics trade managed to miss the 2008 Wall Street crash, the recession that followed, the economic boom beginning in 2016 and the stock market rout at the end of 2018. If the mark of a profession is how it responds to failure, economists face an excellent opportunity.

Economics may have been asleep at the switch in terms of these big events, but that doesn’t mean that it is always wrong. Often enough, at the level of individual, households and businesses, economic “laws” and theories turn out to be right even when they do not seem so at first. Not all markets respond immediately to a change; some may take months and even years to fully adapt.

The delayed reaction time is seen as a weakness in economics by some politicians, providing them with an opportunity to meddle in markets in defiance of economic principles — and common sense.

One example of that is the minimum wage law. In Seattle, setting it at $15 an hour represented a significant increase in the prevailing wage in some industries, especially restaurants.

Economic theory tells us that an increase in the cost of a resource such as labor will reduce demand and send employers in search of substitutes. When at first the Seattle minimum wage law seemed to have no immediate effect on employment, then, it was trumpeted as another economics prediction failure.

A recent report, though, on how restaurants and other business were being squeezed by labor costs and tax increases was highlighted by data on one chain of fast food restaurants. Their answer, because they are a statewide enterprise, was to de-emphasize Seattle operations in favor of expanding in other areas. The economic forces were working as predicted by economic theory; it just took a while. And, importantly, it might never show up in the employment data until the doors were closed on the less-profitable operations.

As an economic problem, the minimum wage laws are a menace. Since initially they don’t seem to have much negative effects on employment, politicians and labor organizations believe that it is a sort of money-piñata. In New York City, for example, there are already rumblings about boosting the recently-adopted $15 minimum wage to $20. That won’t stop economic forces from working, of course, but they may act in ways that are difficult to fit into an econometric model.

One of those ways is the adoption of new technologies in automation, robotics and artificial intelligence. The impact on the restaurant industry will be dramatic. As a friend of mine describes it, “it will be the Automat, whether we want it or not.”

The Automat was a chain of restaurants that, based on technology from Germany, displayed menu items behind glass windows that could be opened by dropping coins in a slot. There were no waiters or waitresses, and other than a cashier and the occasional busboy, no humans visible except customers. The food preparation people worked behind the scenes to keep the glass window displays freshly and fully stocked. Result: a meal that people of modest means could afford.

Tomorrow’s Automat will be different but the same. Payments are likely to include cash-free ID systems and most, if not all, of the food preparation people will be replaced by AI-controlled robots. Labor costs: approaching zero. Result: a meal that people of modest means will be able to afford.

Economists will continue to issue predictions, however wrong, because people demand them. It is an uncertain world, after all. But it is also a world where everything old is new again.