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Will the rising minimum wage lead to more low-paid jobs being automated?

Observation

Summary

The minimum wage is rising rapidly. In 2015 4% of employees aged 25 and over were on the minimum; this is set to reach 12% by 2020. New analysis published today by the IFS shows that those being brought within the minimum wage net are in different sorts of jobs to those who have been on the minimum previously – and in particular they are more likely to be doing jobs that appear more readily doable by machines or computers. For example, many of those on the minimum wage in 2015 were in personal service occupations, such as workers in the hospitality sector. Those jobs are not readily done by machines. But those set to be brought within the minimum wage net in 2020 are more than twice as likely to be in the ten per cent most “routine” occupations – such as retail cashiers and receptionists – as those who were directly affected by the minimum in 2015. This kind of work tends to be easier to “automate”. Ease of automation actually rises even more as one looks somewhat further up the wage distribution, reaching a peak about a quarter of the way up.

The fact that there seemed to be a negligible employment impact of a minimum at £6.70 per hour – the 2015 rate – does not mean that the same will be true of the rate of over £8.50 per hour that is set to apply in 2020. Beyond some point, a higher minimum must start affecting employment, and we do not know where that point is. The fact that the higher minimum will increasingly affect jobs that appear to be more automatable is an additional reason why extremely careful monitoring is required. Meanwhile even higher rates, as proposed for example by the Labour party, would bring even more employees in more automatable jobs into the minimum wage net. Here we document the facts on the ease of automation of work at different wage levels, discuss the implications, and discuss what more we need to know to make minimum wage policy effectively in light of this.

Full version

For employees aged 25 or over, the legal minimum hourly wage – now termed the ‘national living wage’ (NLW) – has risen from £6.70 in 2015 to £7.50 now, will rise further to £7.83 in April, and is planned to reach 60% of median wages in 2020 – which, under current forecasts of wage growth, would be £8.56. More importantly, because this is a much faster rate of growth than for wages in general, this would mean that the fraction of employees aged 25+ subject to the minimum would have trebled in just five years, from 4% in 2015 to 12% in 2020.

As we have said before, there is a case for a higher minimum wage as a tool that the government has to help those on low wages – particularly given that the rises in the minimum up to 2015 do not seem to have had significant adverse effects. However, it does need to be raised with care and according to a rigorous evidence-based process, rather than subject to a political bidding war based on nice-sounding numbers. This follows simply from two facts: first, beyond some point, a higher minimum wage will have adverse consequences for those that it is designed to help; and second, we do not know where that point is. 

The first fact should be easy to see. A £100 per hour minimum wage would make most employees too expensive to employ and, hence, lead to them being unemployed. The important question is at what point before we get to that extreme case do the significant negative effects on jobs (and/or hours of work) start to materialise. Evidence on employment effects to date suggests we had not got to that point by 2015 – but we would get there at some stage if the minimum wage continued to move up the wage distribution.

There is another reason why previous evidence is of limited value when contemplating a trebling of the numbers of employees covered by the minimum: the jobs affected by a higher minimum wage could be quite different from those already affected by it. One way in which this could be the case is if they can be more or less easily substituted with ‘capital’ (e.g. machinery or computers) – or ‘automated’.

Current technologies are relatively effective at executing ‘routine’ tasks – such as calculating supermarket bills and collecting payment – and less effective at tasks that involve forward planning or responding to unusual situations or that require human interaction. The relationship between wages and the importance of routine tasks is not as obvious as one might imagine. Some low-paid jobs actually involve a lot of non-routine work, such as waiters or nursery attendants supervising children; while routine tasks are relatively prominent within some mid-paying occupations, such as bank clerks. Without looking at the data, it is unclear whether those workers brought onto the new, higher minimum wage will be more or less easily replaced with machines than those on the very lowest wages who are already on the minimum wage.

To investigate this, we need to measure how easy it is for employers to replace employees with machines. We use a measure that has been adopted in academic research: the ‘routine task intensity’ (RTI) of each occupation. The logic is that, as discussed above, more routine tasks tend to be more readily performed by technology. All else equal, under this measure, occupations are classed as more routine to the extent that they involve ‘working to set limits and standards’ and ‘finger dexterity’. They are classed as less routine to the extent that they involve ‘undertaking direction, control and planning’, ‘hand-eye-foot coordination’ or ‘mathematical and formal reasoning’. While RTI measures are only proxies for ‘automatability’, research has found that they are both strong predictors of past technological adoption and capable of explaining labour market trends in a number of advanced economies.

The figure shows that, as the minimum wage is raised, we are increasingly affecting workers in occupations that appear easier to automate (i.e. to replace with machines). For example, the workers set to be brought within the minimum wage net in 2020 are more than twice as likely to be in the top 10 per cent most routine occupations – such as retail cashiers and receptionists – as those already paid the minimum in 2015 (11% compared with 5%). It is notable that the increases in the minimum wage that have already occurred over the past two years account for much of this – they have resulted in an especially steep rise in the ‘automatability’ of affected occupations. We still await much in the way of reliable quantitative evidence on the impacts of those recent increases, as stated by the Low Pay Commission. In any case, substitution of workers with technology would, if it occurred, be unlikely to happen immediately.

The figure also shows that ‘automatability’ does not peak until after the 25th percentile of the hourly wage distribution. This means that employees affected by further rises beyond those planned appear to be doing even more readily automatable jobs, on average, than the ones already set to be covered. This would apply, for example, to the £10 per hour minimum in 2020 promised in Labour’s manifesto, which would cut at around the 22nd percentile of the distribution.

This is not the same as saying we know there will be big adverse consequences for low-skilled workers of the planned rises in the minimum wage. The reality is more uncertain – we do not know what the employment effects will be – but also more nuanced than that. First, as with other causes of job loss, it would matter greatly whether anyone who did lose out from automation quickly found adequate re-employment. Moreover, the use of technology to replace some jobs can create new jobs that are complementary to that technology (e.g. people to service machinery). Research in the US has found some negative impacts of higher minimum wages on the employment of low-skilled people in automatable occupations whilst also finding evidence of concurrent employment gains among other groups, with mixed evidence on whether the new jobs that were created were also filled by low-skilled workers or instead were likely to be benefiting those with higher skills. Some workers may themselves be ‘upskilled’ as a result of the higher minimum wage (e.g. through training), and hence remain in employment but end up doing a somewhat different job from the one they did before (or the one that they would have gone on to do).

There is much more to learn here, and the recent and upcoming policy changes in the UK offer an opportunity to do so. As new evidence comes in, it is crucial that policymakers seeking to help low-skilled workers respond accordingly.

Percentage of employees aged 25+ in the most automatable jobs (top 10% of routine task intensity)

Note: Wage distribution based on hourly earnings including overtime in April 2015, for employees aged 25 or over, excluding those whose pay in the reporting period was affected by absence. We use 2015 data so that the position of different employees in the distribution is not itself affected by the minimum wage hikes that occurred from 2016. We use the measure of routine task intensity defined in D. Autor and D. Dorn, ‘The growth of low-skill service jobs and the polarization of the US labor market’, American Economic Review, 2013, 103(5), 1553–97.   
Source: Authors’ calculations using 2015 Annual Survey of Hours and Earnings.