Although the global process of automation and digitalization poses a serious challenge to current and future policymaking, there is a poor understanding of the impact on the economy. With their work The Race between Man and Machine: Implications of Technology for Growth, Factor Shares, and Employment, Daron Acemoglu and Pascual Restrepo study the ambiguous relationship between automation, labor, and economic growth.
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The Race between Man and Machine: Implications of Technology for Growth, Factor Shares, and Employment, by Daron Acemoglu and Pascual Restrepo
A common misconception of automation
Mainstream economic theory about the effect of technology on production assumes technological advances to be factor-augmenting. That is, an increase in technology will also increase the demand for factors of production like labor or capital. However, according to Acemoglu and Restrepo these models ignore one important effect of automation – the displacement of labor. At the core of every industrialization process in history, many labor-intensive tasks have been the target of automation. Production was made faster and more cost-efficient while displacing workers from the tasks that could be performed by machines. Although automation may have a positive economic effect through its resulting increased productivity, it has made capital more relevant than labor, “squeezing workers into a narrower set of tasks.”
Too much automation?
According Acemoglu and Restrepo, the degree of automation also plays an important role in terms of its effect on the economy. The authors argue that although new technologies have been increasingly used in production, productivity growth around the world has been rather slow in the last decades. They suggest that this is the result of an excessive automation. One, which is faster than socially desirable, creating not only inefficiencies, but also wastefully using resources and further displacing workers.
The authors consider that a fiscal bias towards the subsidy of capital relative to labor and a natural belief that investing in machines will be more cost-efficient than hiring workers has triggered excessive automation. Acemoglu and Restrepo explain that too much emphasis on automation may come at the cost of not investing in other more productive resources.
Thus, “[…] automation does not directly augment labor; on the contrary, it transforms the production process in a way that allows more tasks to be performed by machines.” As a result, excessive automation and the aforementioned displacement effect will likely cause a decline in labor demand and wages, and have a negative impact on the overall economy.
Yet, history has shown that several periods of automation have been accompanied by an expansion of the job market and higher wages in many countries around the world. Therefore, Acemoglu and Restrepo suggest that automation can also have a positive impact on labor markets.
New tasks and their countervailing force
According to the authors, the reason why labor markets around the world have not suffered as expected during past industrialization waves lies on the coincidental emergence of new jobs, activities, industries and tasks, which were made possible by advances in technology. In fact, the authors point out that between 1980 and 2010 “the introduction and expansion of new tasks and job titles explains about half of [the] employment growth [in the US].” In their framework “new, labor-intensive tasks (tasks in which labor has a comparative advantage relative to capital) may be the most powerful force balancing the growth process in the face of rapid automation.”
The process of adjustment
The task-based framework of Acemoglu and Restrepo emphasizes two key characteristics of automation. It generates a potential negative effect on labor through the displacement of workers, yet it also produces a reinstatement effect on the labor market through the creation of new tasks, jobs and activities. However, as the authors point out, this underplays some of the challenges of adjustment.
- First, “automation changes the nature of existing jobs, and the reallocation of workers from existing jobs and tasks to new ones is a complex and often slow process. It takes time for workers to find new jobs and tasks in which they can be productive, and periods during which workers are laid off from their existing jobs can create a depressed local or national labor market.”
- Second, new tasks require new skills. There is often a mismatch between skills and technology. Positive adjustments in the labor market depend heavily on the extent to which the workforce is able to provide the required new skills. Third, the mismatch between skill and technology has also an effect on equality. Skilled workers commonly have a comparative advantage in newer and more complex tasks. Automation will disproportionately benefit, at least in the short-run, skilled workers limiting the set of tasks for less skilled workers.
For these reasons, Acemoglu and Restrepo highlight that “[t]here should […] be no presumption that adjustment to the changed labor market brought about by rapid automation will be a seamless, cost-less and rapid process.”
From economic model to reality – we talk with one of the authors
Whether an economy will profit from the benefits of automation will therefore depend on an underlying system that minimizes the negative impact of the displacement effect and fosters, at the same time, countervailing forces like the reinstatement effect of automation. Yet the diversity of economic, political and social systems around the world raises the question whether and how these effects will impact individual countries and regions. In the attempt to find an answer to this question, we talked to Daron Acemoglu.
Acemoglu, D., & Restrepo, P. (2018). The race between man and machine: Implications of technology for growth, factor shares, and employment. American Economic Review, 108(6), 1488-1542.
Daron Acemoglu, Elizabeth and James Killian Professor of Economics at MIT
Pascual Restrepo, Assistant Professor at Boston University