A Note on the Implications of Automation for Economic Growth and the Labor Share

Abstract

We introduce automation into a standard model of capital accumulation and show that (i) there is the possibility of perpetual growth, even in the absence of technological progress; (ii) the long-run economic growth rate declines with population growth, which is consistent with the available empirical evidence; (iii) there is a unique share of savings diverted to automation that maximizes long-run growth; and (iv) automation explains around 14% of the observed decline of the labor share over the last decades in the United States.

Automation and Demographic Change

“…For this case the standard Solow (1956) framework predicts, under certain circumstances, perpetual growth even without technological progress and a declining labor income share (Prettner, 2017). In our contribution we show that countries with a lower population growth rate have a stronger incentive to invest in the adoption of automation.…”

“…While the effects of K t and L t on wages and on the rate of return on traditional physical capital are straightforward, we have a non-standard effect of the accumulation of automation capital: As P t increases, the wage rate decreases because workers compete with automation capital, whereas the rate of return on traditional physical capital increases because automation capital substitutes for workers and therefore raises the productivity of traditional physical capital. Together with the fact that the income stream earned by automation capital flows to the capital owners this mechanism has the potential to explain the decrease in the labor income share that we have observed over the last few decades (Steigum, 2011;Prettner, 2017). It is important to note at this point, that, while automation reduces the marginal value product of labor and thereby the wage rate, labor productivity as measured by output per worker increases in the wake of automation.…”

“…We follow Prettner (2017) and assume that the production function has a Cobb-Douglas structure with respect to human labor and traditional physical capital. However, the additional non-standard production factor "automation capital" is a perfect substitute for labor such that aggregate output is given by…”

“…Instead, the production function has the potential to lead to long-run growth if the savings rate is large enough such that a positive accumulation rate of automation capital can be sustained (cf. Steigum, 2011;Prettner, 2017). Note that Equation (5) resembles the properties of an AK type of production structure.…”

“…The intuitive explanation for this is clear. For a given population size, automation overcomes the diminishing marginal product of traditional physical capital that acts as a boundary for long-run economic growth in the standard Solow (1956) model (see Prettner, 2017, for the analysis of the implications of automation for long-run economic growth in such a setting). Once the tasks which could previously only be carried out by human labor are automated, the stock of labor becomes, essentially, a reproducible production factor.…”