Question

What would be some negative economic effects (specifically on labor markets and automation markets) of a ban on automation after an increase in minimum wage? Explain using positive economic analysis.

Answer 1

When there is an increase in the minimum wages, it is likely that the firms using unskilled labor displace them with automation. If that happens, the unemployment of unskilled or low skilled workers would increase and their overall standards of living would deteriorate. For employers, the increased wage bill due to increased minimum wages is partially countered by a reduction in employment and partially by using relatively cheaper automation. In the market for automation, this is likely to increase the demand and thus, increasing the returns to capital owners.

Now that there is a ban on automation after an increase in minimum wage, the automation market experiences a sudden reduction in returns to capital owners as they are not allowed to supply automation. For employers planning to use automation against displaced workers, they now have to hire relatively expensive labor which increases cost of production and reduce the overall supply of goods and services produced by them. Standards of living for unskilled labor will rise as their demand is now increased after a ban on automation.