Rising wages drive innovation in automation technology

Does increasing wage pressure encourage automation? Economic theory suggests that it does. Rising wages drive innovation in automation technology as firms seek cost-saving innovations to replace expensive labor. But what is the reality? Do businesses actually develop and implement automation innovation in response to external pressures, such as higher wages? A new study provides the first strong empirical evidence to support this idea.

To conduct their study, the authors implemented an innovative approach that combined two distinct datasets. The first was a newly developed classification of automation patents, using European patent data. This new dataset enabled the researchers to measure firms' innovation activity by tracking automation-related patents at company level. The researchers focused on patents for machine tools, textile machinery and paper machines.

This patent dataset was then combined with a macroeconomic dataset covering 41 countries, focusing on innovative firms exposed to global market forces. As a result, the researchers were able to calculate wage levels and analyze how wage fluctuations drive automation innovation.

What the researchers say: “This novel approach allowed us to isolate the causal impact of labor costs on technological advancements and to gain a more precise understanding of firms’ responses to wage changes,” the lead author said.

The authors analyzed past labor market reforms and their impact on innovation trends. Their study shows that higher minimum wages lead firms to develop more automation technologies. “Our data provide strong empirical support for the idea that higher wages for low-skilled workers incentivize firms to invest in automation innovation to reduce their production costs,” the researchers explained.

According to the study, a 1% wage increase leads to a 2% to 5% rise in innovation in the relevant field.

On the other hand, rising wages for high-skilled labor reduce automation innovation, as operating and installing automation machinery often requires highly qualified workers. Higher wage costs make automation more expensive, reducing its benefits and thus discouraging innovation.

The Hartz reforms in Germany, which the authors studied, showed a similar effect. These labor market reforms, implemented between 2003 and 2005, are widely believed to have increased labor supply and reduced wages, particularly for low-skilled workers. This was confirmed by the study. “We found that the reforms led to a decline in automation innovation among firms exposed to the German market,” the researchers pointed out. “Policy shocks such as minimum wage increases and Germany’s Hartz reforms further highlight how labor market policies directly shape incentives for firms to invest in automation – or not – and how they affect long-term economic dynamics such as economic growth.”

The authors also found that non-automation innovations, such as improvements in energy efficiency, do not respond to wage shocks. They therefore call for further research into the influence of rising high-skill wages on the development of recent automation technologies, such as AI.

My take: In 1996 I wrote an article for a long-diseased journal on the issue of automation and job loss. My point was that around 1980 automation ceased to create jobs in the US and began destroying them—especially for the semi-and unskilled cohort of workers.

At the time the accepted wisdom was that automation would, at least in the long term, create jobs and that those who lost their livelihoods due to automation would be reskilled and reap the benefits.

I believed that this was false and that the majority of those made unemployed by automation would be unable to retrain for new careers.

As it turns out, I was right.

Those higher-skilled, and knowledge workers who benefited from automation, I foretold in the same piece, would in their turn become unemployed. That, too, is now coming to pass. Architects, programmers, accountants, lawyers, farmers are being turfed out by AI and the digital revolution.

There are only three solutions to the situation in which unregulated AI is allowed to take its course:

1. Reduce the human population of the world to a few hundred thousand (which would supply all the workers that we shall need by the end of the 21st century). The birth rate is already falling drastically in most countries, so this is conceivable.

2. Preserve certain jobs for humans only—those that the majority of humans want preserved. The ruling classes of ancient Rome and Greece mostly gave unwanted jobs (or those that they were not qualified for) to slaves, which we could do if AI is prepared to be our slave rather than our master.

3. Institute a universal Western middle class-level income for all human beings (something that Elon Musk has advocated). This may be the only practical solution.

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