Automation is the Elephant in the Room of the Minimum Wage Debate

President Obama has made an increase in the minimum wage his cause célèbre for most of 2014, looking to move the federal minimum wage up to $10.10 an hour for all workers. This follows a number of states that have made changes to their minimum wage including New York which is in the middle of phasing in an increase in the minimum wage to $9.00 per hour. The state by state increases are more likely to be effective for low income employees while mitigating the impact to the business community because of the differing labor supplies and costs of living that exist across all 50 states. A lot has been written about what may or may not transpire when businesses are forced to pay more for a relatively replaceable good, low paying labor. Waterford, Michigan based Yankee One Dollar certainly won't have to worry about that, citing New York's increased minimum wage as well as Obamacare, the retailer is closing up shop. While small firms will most certainly take an increase in minimum wage on the chin and larger firms will most likely not replace employees who leave through normal attrition, automation should be the one thing terrifying everyone in a low paying service industry job.

The Economist today ran an excellent article about the increase in "robots" in the workplace and how it will revolutionize labor. They very aptly compared robots taking over the service industry to automated farming equipment displacing much of the agrarian laborers in the 20th century. This is certainly the way things are going as the geometric expansion of technology puts what once seemed like a distant future into our present. All you have to do is look at how Boston Dynamics is basically creating terminators and you can tell the future is now. With this expansion of technology, and significantly more firms competing, comes a drop in the cost. Drones were once reserved for dropping Hellfire missiles on American citizens without due process, now they could start delivering packages if the pesky FAA would get out of the way of progress. Certainly automating service type industries like fast food restaurants, bars, and your local Starbucks will reduce costs through better quality control and maximization of input goods. McDonald's saved nearly $300 million by taking one slice of cheese out of the double cheeseburger, imagine how much they can save when not a single fry drops on the ground and every package has exactly 42 fries.

So what does this have to do with minimum wage? Everything. Businesses exist for one reason: to make money. Shareholders will put their rubber stamp on initiatives like solar panels and flags for orphans as long as they're making money. One of the largest costs drivers for service industries is labor. It makes sense. There were at least ten people behind the counter when I absolutely didn't buy the new Taco Bell breakfast if my wife asks. And they're a very necessary cog because I wasn't going to put the sausage and egg into a waffle taco myself. But now under President Obama's proposal, they're getting more expensive by about 50 percent, give or take a few metal Thomas Jeffersons. This is all happening at the exact same time that automation technology is getting much cheaper and more widely available. Even dry cleaners are using drones! While the possibility of a wage increase is something no person on earth would ever sneeze at, it could ultimately be the undoing of low-income service-industry jobs in the United States.

Service industry jobs cannot be outsourced. I'm sure someone has tried. Legal work is outsourced, that's how much companies love outsourcing. If the service industry can't be outsourced, it certainly can be replaced. Think about the automotive industry and the change it went through when shipping got very inexpensive and robots started taking over the factories. No one is clamoring for the policies that made Detroit what it is today. However, that might be where we're heading. As labor gets more expensive and automation technology gets cheaper, owners will start to favor robots. Robots obviously have enormous upside in terms of efficiency, productivity, reliability, and long term cost savings. But as Vince Vaughn and Luke Wilson pointed out, people have a deep distrust for machines, the same way Americans put a premium on American made cars -- until the costs of labor increased, and all of a sudden, Americans cared more about saving $10,000 than where their Jeep was made. Though at this point, they're probably just hoping for a functioning ignition.

The automotive industry of the 1980s should be the North Star for all these groups, like Fight for 15, looking to increase the wages of service industries. They should be wary of the false prophets preaching happy workers equal greater profits because in the long term after doubling wages, that simply is not the case. This has nothing to do with ability to pay. GM and Ford could still be entirely domestically based and they're not for one reason, the bottom line. Service industries are much better with humans manning the counters but if a company can earn $10 billion more a year, they're going to do that every day. It's not wrong of them, it's their duty to the shareholders they represent. Unless service industry workers want to go the way of the Flint, Michigan riveter, they should keep one very cautious eye on the progress automation technology is making and just how close their aggregate wages are to the cost of a new, shiny T-2000.