The Case for a Higher Minimum Wage to Drive Innovation
The minimum wage debate is missing one important point: Higher minimum wages spur innovation.
A lot of companies sell products and services to help streamline operations and lower costs. Cheap labor is a barrier to innovation because it means that any investment in new technology will take that much longer to pay out. As U.S. minimum wage labor got cheaper in real dollar terms over the past decade, it has become harder for these companies to innovate.
A great example is Ecolab, a company that sells cleaning products and equipment to hotels, restaurants and other businesses that employ minimum wage workers. Ecolab’s business model is to provide more advanced, automated cleaning equipment and supplies (like self-dosing washing machines and automated cleaning devices) that get the job done with less labor, thus reducing costs.
But as labor costs stay flat or go down, it becomes harder for them to demonstrate economic value through labor savings to their customers. Ecolab and companies like it are probably sitting on innovations that don’t yet pay out, but might become viable if the minimum wage were to increase to $9 or $10 per hour.
A February report from the Congressional Budget Office report estimates that a minimum wage at $10 per hour would cost the economy 500,000 jobs. But this analysis fails to take into account the secondary and tertiary benefits of the “innovation stimulus” from a minimum wage hike that would likely add more skilled jobs to the economy.
McDonald’s, one of the largest employers of minimum wage workers, owes much of its historic success to rising minimum wages. Ray Kroc’s original business model at McDonald’s when he founded it in 1955 was to develop more efficient ways to cook and serve hamburgers using automated equipment and more standardized ways of working so his shops could produce more food per employee, hence the invention of “fast food.”
McDonald’s was able to undercut local hamburger shops on cost. Its success was fueled by a rapidly rising federal minimum wage, which grew from 75 cents per hour when McDonald’s was founded to $1.40 per hour just 12 years later, making it harder for local hamburger joints with higher labor costs to compete.
McDonald’s success also created a variety of new jobs. A whole new set of companies was formed to supply high-tech fast food equipment, like Illinois-based Prince Castle, which was founded in 1955 to service McDonald’s and now sells fast food equipment globally.
The UPC barcode is another example of an innovation made feasible by higher minimum wages. Prior to the invention of barcodes, grocery stock clerks manually attached price stickers to every package in the supermarket. Printed barcodes on packages eventually eliminated that task, saving grocery retailers millions of dollars in labor. But in 1973, even though IBM had developed a working barcode system, none of the grocery chains wanted to adopt it. They couldn’t justify the investment, as minimum wage labor was only $1.60 per hour, so it was cheaper for them to keep manually applying price stickers. But by 1980, the minimum wage jumped to $3.10 per hour, drastically changing the economics and leading almost every store to convert to a UPC system by 1985.
While many stock clerks lost their jobs, several new industries were created. IBM, NCR and other computing companies benefited by selling scanner systems, which later went global. And AC Nielsen created a whole new business selling the newly-available scanner data and sales analytics to manufacturers to help them better understand how their products were selling and how well their marketing was working. Today Nielsen employs 40,000 people in jobs that pay a lot better than stock clerks.
RFID tags represent the next generation of product scanning, but the technology is still sitting on the sidelines because it hasn’t crossed that cost-benefit threshold….
There are hundreds, perhaps thousands, of innovations like this that might become commonplace through a simple change in the minimum wage. Smart, innovative companies should be pushing for a minimum wage increase…
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