Labor market policies shape firms’ innovation dynamics. A new study by UBS Foundation Professor David Hémous and co-authors shows for the first time that higher minimum wages for low-skill jobs drive firms to develop automation technologies. Rising wages for high-skill labor, in contrast, can hamper this effect.

This article by UZH News was originally published by UZH Department of Economics in February 2025. Edited for layout purposes by the UBS Center.

Does increasing wage pressure encourage automation? Economic theory suggests that it does. Rising wages drive innovation in automation technology as firms seek cost-saving innovations to replace expensive labor. But what is the reality? Do businesses actually develop and implement automation innovation in response to external pressures, such as higher wages? A new study by UZH economists provides the first strong empirical evidence to support this idea.

Patent data and wage analyses

To conduct their study, the authors implemented an innovative approach that combined two distinct datasets. The first was a newly developed classification of automation patents, using European patent data. This new dataset enabled the researchers to measure firms' innovation activity by tracking automation-related patents at company level. The researchers focused on patents for machine tools, textile machinery and paper machines.

This patent dataset was then combined with a macroeconomic dataset covering 41 countries, focusing on innovative firms exposed to global market forces. As a result, the UZH researchers were able to calculate wage levels and analyze how wage fluctuations drive automation innovation. “This novel approach allowed us to isolate the causal impact of labor costs on technological advancements and to gain a more precise understanding of firms’ responses to wage changes,” says first author David Hémous, associate professor of economics of innovation and entrepreneurship at UZH.

Higher minimum wages boost innovation

The authors analyzed past labor market reforms and their impact on innovation trends. Their study shows that higher minimum wages lead firms to develop more automation technologies. “Our data provide strong empirical support for the idea that higher wages for low-skilled workers incentivize firms to invest in automation innovation to reduce their production costs,” says David Hémous. According to the study, a 1% wage increase leads to a 2% to 5% rise in innovation in the relevant field. In turn, rising wages for high-skilled labor reduce automation innovation, as operating and installing automation machinery often requires highly qualified workers. Higher wage costs make automation more expensive, reducing its benefits and thus discouraging innovation.

Impact of labor market policies

The Hartz reforms in Germany, which the authors studied, showed a similar effect. These labor market reforms, implemented between 2003 and 2005, are widely believed to have increased labor supply and reduced wages, particularly for low-skilled workers. This was confirmed by the UZH researchers’ study. “We found that the reforms led to a decline in automation innovation among firms exposed to the German market,” says Hémous. “Policy shocks such as minimum wage increases and Germany’s Hartz reforms further highlight how labor market policies directly shape incentives for firms to invest in automation – or not – and how they affect long-term economic dynamics such as economic growth.”

Not all innovation responds to wage shocks

The authors also found that non-automation innovations, such as improvements in energy efficiency, do not respond to wage shocks. They therefore call for further research into the influence of rising high-skill wages on the development of recent automation technologies, such as AI.

David Hémous, Morten Olsen, Carlo Zanella, Antoine Dechezleprêtre. Induced Automation Innovation Evidence from Firm-level Patent Data. Journal of Political Economy. 2025