The minimum wage debate is missing one important point: Higher minimum wages spur innovation.
A lot of companies sell products and services to help streamline operations and lower costs. Cheap labor is a barrier to innovation because it means that any investment in new equipment will take that much longer to pay off for the customer. As U.S. minimum wage labor got cheaper in real dollar terms over the past decade, it has become harder for these companies to innovate.
A great example is Ecolab (ECL), a company that sells cleaning products and equipment to hotels, restaurants, and other businesses that employ minimum wage workers. Ecolab’s business model is to provide advanced, automated cleaning equipment and supplies (such as self-dosing washing machines and automated cleaning devices) that get the job done with less labor, thus reducing costs.
As labor costs stay flat or go down, it becomes harder for Ecolab to demonstrate economic value through labor savings to its customers. Ecolab and companies like it are probably sitting on innovations that don’t yet pay out but might become viable if the minimum wage were to increase to $9 or $10 per hour.
A February report from the Congressional Budget Office report estimates that a minimum wage at $10 per hour would cost the economy 500,000 jobs. But this analysis fails to take into account the secondary and tertiary benefits of “innovation stimulus” from a minimum wage hike that would probably add higher-skilled jobs to the economy.
McDonald’s (MCD), one of the largest employers of minimum wage workers, owes much of its historic success to rising minimum wages. Ray Kroc’s original business model at McDonald’s when he founded it in 1955 was to develop more efficient ways to cook and serve hamburgers; he used automated equipment and more standardized ways of working so his shops could produce more food per employee. So went the invention of “fast food.”
McDonald’s was able to undercut local hamburger shops on cost. Its success was fueled by a rapidly rising federal minimum wage, which grew from 75¢ per hour, when McDonald’s was founded, to $1.40 per hour just 12 years later, making it harder for local hamburger joints with higher labor costs to compete.
McDonald’s success also created a variety of new jobs. A new set of companies was formed to supply high-tech fast food equipment; one was llinois-based Prince Castle, which was founded in 1955 to service McDonald’s and now sells fast food equipment globally.
The UPC barcode is another example of an innovation made feasible by higher minimum wages. Prior to the invention of barcodes, grocery stock clerks manually attached price stickers to every package in a supermarket. Printed barcodes on packages eventually eliminated that task, saving grocery retailers millions of dollars in labor. But in 1973, even though IBM had developed a working barcode system, none of the grocery chains wanted to adopt it. They couldn’t justify the investment because minimum wage labor cost only $1.60 per hour, making it cheaper for them to keep manually applying price stickers. By 1980, the minimum wage had jumped to $3.10 per hour, drastically changing the economics and leading almost every store to convert to a UPC system by 1985.
While many stock clerks lost their jobs, several new industries were created.IBM (IBM), NCR (NCR), and additional computing companies benefited by selling scanner systems that later went global. And AC Nielsen (NLSN) created a new business selling the available scanner data and sales analytics to manufacturers to help them better understand how their products were selling and how well their marketing worked. Today, Nielsen employs 40,000 people in jobs that pay a lot more than stock clerks earn.
RFID tags represent the next generation of product scanning, but the technology still sits on the sidelines because it hasn’t crossed that cost-benefit threshold. The tags use radio frequency signals to allow products to be scanned and inventory to be managed in bulk from a distance, eliminating the need for workers to scan individual items. The cost has come down to 7¢ per tag, making them close to affordable, so it is possible that a minimum wage change would make this technology widely viable.
Hundreds, perhaps thousands, of such innovations might become commonplace via a simple change in the minimum wage. Smart, innovative companies should be pushing for a minimum wage increase because it represents an opportunity to create disruptive products and services that will move companies, industries, and the U.S. economy forward.