Productivity And The Minimum Wage - Higher Productivity Does Mean Fewer Jobs

One of the arguments that is used in the minimum wage debate is that a higher minimum wage will drive productivity higher. This is true, it will, because only those jobs where the labour is productive enough to cover the higher minimum will survive. We don't in fact measure the productivity of unemployed people. Thus, if one of the adaptation mechanisms to a higher minimum wage is that businesses increase labour productivity then by definition there will be fewer jobs:

“Sir Charlie Mayfield, chairman of the John Lewis Partnership and a government adviser on productivity, told the Guardian that the national living wage could be a pur to productivity because it could encourage more use of automation in workplaces. That could lead to fewer jobs in some industries, Mayfield admitted, but would also spur stronger economic growth.

Think we will see automation happening faster. It would be wrong to say that the national living wage is going to create a great increase in automation in sectors like retail, but it will be a contributing factor to an acceleration of automation in some sectors and it will have impact on employment levels, he said.

This is obviously so.

Imagine, just to invent some numbers to provide an example, that currently it takes 10 people to produce 100 hamburgers an hour. And that there's a machine out there which could enable double that production rate from the same labour. Finally, there's some wage level where it makes sense to use the machine and some labour rate where it does not. That last is obviously true--there will always be some pay rate at which we wouldn't bother to use the machine.

So, we raise the minimum wage above the rate where the machine makes sense. We can now use either 5 people plus the machine to make our 100 hamburgers an hour, or 10 plus the machine to make 200. Either answer, whichever we do, means that we are using less labour. In the first case 5 people lose their jobs. In the second we've not hired the other 10 people we would have needed to to reach this production level without the machine.

Thus we cannot use the argument that we see all too often. Don't worry about jobs losses from a higher minimum wage because business will just increase labour productivity instead. But that's exactly how the jobs are lost, through that increase in labour productivity.