The Race Between Man and Machine: Implications of Technology for Growth, Factor Shares and Unemployment | 2018
Joint with Daron Acemoglu
The advent of automation and the simultaneous decline in the labor share and employment among advanced economies raise concerns that labor will be marginalized and made redundant by new technologies. This paper examines this proposition in a task-based framework wherein tasks previously performed by labor are automated, more complex versions of existing tasks can be created, and in these new tasks labor tends to have a comparative advantage. We fully characterize the structure of equilibrium in this model, showing how the allocation of factors to tasks and factor prices is determined by the available technology and the endogenous choices of firms between capital and labor. We then demonstrate that although automation tends to reduce employment and the share of labor in national income, the creation of more complex tasks has the opposite effect, and both types of innovations contribute to economic growth. Our model endogenizes the direction of research and development towards automation and the creation of new complex tasks. Endogenous technology is consistent with a balanced growth path in which both types of innovations go hand-in-hand. More importantly, our analysis shows that the equilibrium self-corrects: an increase in automation reduces the wage to rental rate ratio, which discourages further automation and encourages greater creation of more labor-intensive tasks. This process restores the share of labor in national income and the employment to population ratio. Though the economy is self-correcting, the equilibrium allocation of research effort is not optimal. Automation is attractive to firms because it reduces wage payments. To the extent that wages reflect quasi-rents for workers, firms will engage in too much automation. Finally, we extend the model to include workers of different skills. We find that inequality increases during transitions, but the self-correcting forces of the economy limit the increase in inequality over longer periods.