Is increasing wage pressure a catalyst for automation? Economic theory posits that it is. As wages rise, innovation in automation technology gains momentum, driven by companies’ pursuit of cost-saving alternatives to expensive labour. But does this theory hold in practice? Do companies forge ahead with automation innovations in response to external pressures like higher wages? Groundbreaking empirical evidence from a new study by economists at the University of Zurich (UZH) affirms this notion.
The authors employed a novel method integrating two distinct datasets to facilitate their research. The primary dataset was a freshly established classification of automation patents derived from European patent data. This innovative dataset allowed the researchers to track automation-related patents at the company level, thereby assessing firms’ innovation activities. The focus was mainly on patents related to machine tools, textile machinery, and paper machines.
These patent records were subsequently merged with a macroeconomic dataset spanned 41 countries, mainly focusing on innovative companies susceptible to global market dynamics. This amalgamation enabled the UZH team to evaluate wage levels and examine the extent to which wage fluctuations spur automation innovation. “This innovative approach enabled us to isolate the causal effect of labour costs on technological advancements, thereby offering a more accurate insight into how companies react to changes in wages,” explains David Hémous, the study’s lead author and associate professor of economics of innovation and entrepreneurship at UZH.
The study also delved into the effects of higher minimum wages on innovation. It found that increased minimum wages encourage companies to develop more automation technologies. “Our findings robustly support the idea that higher wages for low-skilled workers motivate companies to channel investments into automation innovations to cut down on production costs,” states David Hémous. The research revealed that a 1% wage increase results in a 2% to 5% surge in innovation within the relevant sectors. Conversely, rising wages for high-skilled labour tend to dampen automation innovation, as the deployment and operation of automation machinery often necessitate highly skilled personnel. Elevated wage costs make automation pricier, diminishing its advantages and deterring innovation.
The impact of labour market policies was also a focal point of the study. The Hartz reforms in Germany, which were implemented between 2003 and 2005 and are believed to have boosted labour supply while suppressing wages, particularly for low-skilled workers, provided a case study. The UZH researchers found that these reforms reduced automation innovation among companies dealing with the German market. “Events like the rise in minimum wages and Germany’s Hartz reforms underscore how labour market policies directly influence corporate incentives to invest in automation—or not—and how these policies shape long-term economic trajectories such as economic growth,” notes Hémous.
However, the study also observed that not all innovation reacts to wage shocks. Innovations in non-automation sectors, such as those aimed at enhancing energy efficiency, appeared unaffected by wage changes. This observation has prompted calls for further research into the impact of rising wages for highly skilled workers on the development of recent automation technologies, including artificial intelligence.
More information: David Hémous et al, Induced Automation Innovation: Evidence from Firm-level Patent Data, Journal of Political Economy. DOI: 10.1086/734778
Journal information: Journal of Political Economy Provided by University of Zurich