Are $18 Big Macs the price of falling inequality?

“If the burgeoning bargaining power of less-skilled workers comes at middle-class consumers’ expense in the short run, almost everyone stands to benefit from rising working-class wages in the long term.

Middle-class households can more easily afford servants in many developing countries than they can in the United States. Yet America’s middle class is nevertheless far wealthier than its counterparts in India or Pakistan. Even the privileged are generally better off in an economy with high levels of labor productivity than in one with a large pool of hyper-exploitable workers.

And there’s reason to believe that rising working-class wages are a key driver of productivity gains. When workers’ time is cheap, businesses have little incentive to develop labor-saving technologies or production methods. As wage bills rise, by contrast, innovation often becomes imperative.

Ironically, conservatives often cite this reality as an argument against increasing the minimum wage. Specifically, right-wing economists and commentators have often warned that raising the wage floor will cause employers to automate jobs away. Yet this is another way of saying that minimum wage hikes increase investment in productivity-enhancing technology (which is the ostensible aim of just about every Republican tax cut plan).

In any case, it is true that when wages rise at the bottom of the labor market, firms invest in labor-saving technology. In 2018, Grace Lordan and David Neumark demonstrated this empirically. Those economists reviewed 35 years of government census data, identified jobs that could be automated given existing technology, and found that after minimum wage increases were enacted, “the share of automatable employment held by low-skilled workers” declined. In other words, minimum wage hikes spurred capital investment and increased productivity by mechanizing tasks that did not require uniquely human skills.

 The notion that high wages spur productivity gains is consistent with the American economy’s broader historical record. As Neil Irwin observed in 2018, productivity booms have tended to follow labor market booms, while deep recessions have given way to productivity slumps.

This relationship between wage gains and productivity can be witnessed within today’s food service industry. As Bloomberg’s Justin Fox notes, as restaurant wages jumped between 2020 and 2021, the sector’s output per worker hour soared by 21 percent.

In the short term, these productivity gains have not been sufficient to reduce restaurants’ operating costs and, thus, prices. But in the long term, when businesses increase the labor efficiency of their production processes, their wares tend to become more affordable.

A world of cheap burgers and high working-class wages is therefore possible. Middle-class consumers need not see the rising fortunes of less-skilled workers as a threat to their standard of living.

For the moment, though, there is a genuine tension between boosting compensation for America’s most vulnerable workers and minimizing the cost of labor-intensive services for the nation’s consumers. Precisely how liberals can best navigate this tension isn’t easy to say. At the very least, though, we should not encourage our fellow Americans to mistake the symptoms of rising worker power for those of a deepening economic crisis.”

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