McDonald’s current CEO Chris Kempczinski confirmed during Alliance Bernstein’s Strategic Decisions Conference last week that the company is testing an automated, voice-recognition based drive-thru ordering system at 10 of its Chicago locations. Kempczinski noted that the artificial intelligence technology has 85% accuracy with filling orders, with workers having to step in for approximately one in five orders.
Businesses in competitive markets like McDonald’s face strong incentives to harness labor-saving technologies to improve efficiency, at least when such investments make sound economic sense. But the race to automate can have less benign drivers: higher minimum wages, by raising the cost of low-paid labor, act as an effective subsidy to more uneconomic forms of labor-saving innovation. Incentivizing these inefficient investments reduces economic wellbeing.
As former McDonald’s CEO Ed Rensi told Fox Business, there is no free lunch where minimum wage hikes are concerned. Assuming businesses know what is good for their bottom line, increasing hourly labor costs by government diktat causes profit-seeking businesses to try to recoup losses elsewhere.
Some companies will cut workers hours or jobs, others reduce employee perks or other non-pay benefits. McDonald’s itself has previously reacted to minimum wage hikes by raising its prices, passing on the cost when it can to (often low-income) consumers.
Rensi though highlights another channel of adjustment that chimes with Kempczinski’s announcement: when companies feel that they cannot sustainably pass on wage costs to consumers, they might consider making one-off lumpy investments in new technologies that would otherwise make no economic sense, but which the policy-determined wage makes relatively more appealing.
Market-led automation—whether apps for ordering your morning coffee, or one day perhaps even “burger making machines”—are often the sorts of technological improvements that raise living standards. New methods that save on labor costs and enhance productivity increase wages in a sector for the fewer remaining workers and can reduce product prices, while freeing up resources to move into other industries. This is what happened with agriculture and then manufacturing, with the benefits all around us. So, pointing out that minimum wage policies can encourage automation is not to be generally anti-technology or suggest that companies shedding jobs is always a bad idea.
But “regulating wages to encourage innovation,” effectively subsidizing the introduction of some technologies before they are actually high quality and cost effective, is obviously highly damaging to our economic health. Faced with prices and wages that do not reflect reality, businesses make costly investments that don’t make economic sense. The quality of the service to consumers can fall if the technologies aren’t ready (think of time wasted interacting with bad self-service machines even now). And this sort of “pressured” innovation risks prematurely destroying the sorts of low‐skilled, entry‐level jobs that allow the development of human capital and transferable skills, such as punctuality, customer service and being able to work in a team.
Not all automation, in other words, is created equal. Indeed, if raising minimum wages to encourage automation was “good for the economy,” then why not increase the minimum wage to $100 per hour to really see a productivity boom?
