Conor Sen

Rising Wages Herald a New Era of Jobless Growth

Current labor shortages might be temporary as workers re-enter the labor force over the next several months, but the higher pay they're earning won't be, given the tendency for wages to be sticky. That's going to make this economic expansion different than the last one.

An expansion starting with high wages and a constrained labor pool will encourage the creation of businesses built around automation and artificial intelligence rather than companies that rely on hiring large numbers of low-paid workers. This poses both risks and opportunities for society, particularly relating to challenges like income inequality.

When business owners or entrepreneurs are looking to start or expand businesses, economic conditions matter. And in the early 2010's, when unemployment was high and wages were low, it made sense to start labor-intensive companies like Uber Technologies Inc. and Lyft Inc. They were technology companies in the sense that they allowed customers to request vehicles by pushing a button on their phones. But at the end of the day, the businesses still required hundreds of thousands of drivers to give rides to customers, who found the services useful in part because fares were low.

And though we think of the 2010's as being a decade dominated by technology companies, the era was disappointing from the standpoint of productivity growth. Because there was a large pool of low-paid workers to draw from, it often made sense to just hire more people rather than invest in labor-saving technology. Since worker incomes were low and not growing very fast, there wasn't much need for companies to expand capacity to plan for future demand, hampering economic growth. It was a chicken-and-an-egg quandary, which is why the economy too often felt stuck in a rut.

That's not the situation prospective entrepreneurs find themselves in today. The average Uber or Lyft ride is 40% more expensive than it was a year ago, in part because of a lack of drivers. Companies like Chipotle Mexican Grill Inc., Inc., and McDonald's Corp. are raising wages to attract workers. While we might not get a national minimum wage of $15 an hour, enough states and cities and big companies are moving in that direction that large national employers might assume we'll get there sooner rather than later. A new business that needs $10 an hour labor to be viable is no more likely to emerge today than one needing oil at $20 a barrel.

The new $100 billion businesses built in the 2020's won't depend on cheap labor, but will either be able to pay high enough wages to draw workers away from other firms, or be less labor-intensive altogether. In other words, while technologists have been talking for years about an economy based on more automation and artificial intelligence, we finally have the conditions in place to incentivize entrepreneurs and businesses to invest in it.

The hope is that this will mean everybody wins. A more productive economy should always be the goal, and we're all better off if a technology like autonomous vehicles enables driverless Uber and Lyft rides, while former drivers are able to find better-paid jobs doing something else. The risk is that service workers enjoy a few years of higher wages before companies' use their new labor-saving technology to throw millions of people out of work and drive down wages again, further widening income inequality.

These are the scenarios we should keep in mind for the rest of the year as we confront surging wages and inflation fears. We're in an unusual period where industry is swamped with demand while workers have been slow to return. Companies are still focused on today's bottlenecks rather than planning for the future.

Once businesses and entrepreneurs are in a position to plan for 2025 rather than just next week, the focus will move swiftly to automation and other forms of labor-saving investments as an alternative to scrambling to hire workers at higher pay. That's why policymakers should stick to their commitment to full employment and not assume wage increases will be sustainable forever. To the extent companies have success deploying automation technologies, the battle for full employment might be just beginning.