Protect the value of human assets

The sustained automation of low- and middle-income wage jobs has given rise to a tension between the regulation of employment and technological innovation.

Bill Gates, speaking to MSNBC, reminded us of this tension late last month when he came out against raising the federal minimum wage: "If you raise the minimum wage, you're encouraging labor substitution, and you're going to go buy machines and automate things." The notion that a minimum wage increase alone can promote automation is no doubt true. Still, minimum wage increases make up but a fraction of the story.

For well over a century now, modern economies have steadily increased the regulation of employment and wages. The laws are multi-faceted. In California alone they span the Labor Code, the Health and Safety Code, the Business and Professions Code, the Revenue and Taxation Code, among many other codes. They do not include the plethora of federal laws governing employment. Federal and state regulation of employment has accomplished real good. It stopped the worst abuses of the industrial revolution and clearly improved the lives of millions of people in this country alone.

Yet, the regulation of employment has become daunting and sometimes downright scary to many well-intended, law abiding business owners. Even technical violations of laws regulating employment can lead to liability for the payment of attorney fees, costs and statutory penalties. Misclassification as an independent contractor can result in devastating $25,000 penalties on small business. Small oversights on check stubs can lead to legal exposure. A supervisor's awkward treatment of one employee can result in substantial exposure for discrimination. An employee's missed meal break can easily become a $5,000 mistake when factoring in the cost of defense and payment of the employee's attorney fees. It is not unfair to say that anytime a California employer takes on an employee, it assumes the unforgiving responsibility of near perfection in its administration and treatment of her.

Not that current laws do not protect against serious violation of people's rights. They do. However, the technical edges of the labor and other employment-related codes capture many an objectively harmless violation in their juggernaut. In other words, they encourage automation without arguably accomplishing much.

Perhaps coincidently or perhaps not, California is at once the center of technological advances in automation while enacting arguably the most aggressive labor and wage laws in the country. As employers, the startups and other companies working on automation in this state are surely aware of the known and unknown costs of employing people here. Perhaps they become emboldened in their work every time they read about a settlement of large employment class actions. Perhaps they smile when the state Legislature adopts or strengthens a section of the Labor Code.

I cannot blame an employer who, in an attempt to limit legal exposure, finds ways of simplifying her business to reduce head count. I cannot blame a restaurant chain for replacing wait staff with iPads at each table if doing so reduces the risk of wage and hour lawsuits, a PAGA suit, reduces workers compensation premiums, or reduces the cost of compliance with any of the above rules. An employer faces no legal exposure to an iPad if the employer takes it out of service because of obsolescence. A burger-flipping robot will not sue because a co-worker made a bawdy joke, the company accidently paid it a day late, or it was not recharged quickly enough.

Whether or not Gates is right to link minimum wage increases on their own to the loss of low wage jobs, close regulation of employment certainly encourages it. To that extent, it works against the very people it was supposed to protect.

In fairness, other factors encourage automation too. Machines are often more productive than people. A lack of suitable employees sometimes encourages it too. Other human imperfections ranging from the need for rest to the diversion of attention make automation desirable.

Moreover, billions of dollars go into drones, robotics, computer miniaturization, and other technology each year for military purposes alone. The technology has many secondary applications in private sector automation, too. No freeze on minimum wages or revision of modern employment and wage laws will stop such advances in technology. Still, the existence of other factors in the mix takes nothing from the correlation between overly aggressive employment regulation and automation.

Gates did not touch on what happens when low wage jobs come under pressure from automation. Other people have recently. The French economist and best-selling author Thomas Piketty has received wide-spread attention over the last 18 months for his reflections on the state of modern economies. In his best-selling book "Capital in the 21st Century," Piketty demonstrates a disparity between the value of labor and value of capital. The rate of return of capital exceeded the rate of return on labor in 2010 for the first time since the 1920s.

That fact does not portend well for advanced economies if history is any gauge. Leaving aside the similarities between 2010 and the period before the Great Depression, Piketty's observations on the disparity in value between labor and capital suggest that the standard of living for ordinary people is decreasing rather than increasing. They suggest that wealth disparities are likely to grow as people who own assets become even wealthier from those assets, in part through the sale of labor-saving machines. Piketty suggests an inverse correlation between regulation and the value of thing regulated. Here, capital assets, being largely unregulated, are valuable. The value of human assets, being highly regulated, is now in decline.

Policymakers will come under increasing pressure to help workers who become displaced through automation. Incremental increases in the regulation of employment do not appear to be the right response. Additional regulation of employment over the last decades has not changed the fact that rate of return of labor when compared to return on capital is at its lowest since before the Great Depression. If anything, trying too hard to protect ordinary people through wage and employment laws has encouraged automation at the expense of ordinary people's wages.

There are other potential solutions for systemic underemployment of low wage workers. While the regulation of employment has received too much attention from policymakers, the regulation of working assets has perhaps received too little attention from them. In theory, governments can tax working assets or the connectivity that helps make working assets efficient. People can be taxed less than they are today. The technical edges of wage and employment laws can be reconsidered. Doing so can help more newly displaced workers consider entrepreneurship rather than employment as a viable option without facing as much risk from labor code violations. New businesses are particularly prone to such violations when they start to hire others.

As a society, we firmly believe that success ought to be available to those who work hard and responsibly no matter what resources their parents may have blessed them with. Yet, our belief in this equality of opportunity is likely to be sorely tested over the coming decades as automation runs its course.

It is now time for policymakers to address low wage underemployment in ways that do not, as an unintended consequence, further diminish the value of low wage workers.