The Race Between Man and Machine: Implications of Technology for Growth, Factor Shares and Employment

The advent of automation and the simultaneous decline in the labor share and employment among advanced economies raises concerns that labor will be marginalized and made redundant by new technologies. This paper examines this proposition in a task-based framework wherein not only are tasks previously performed by labor automated, but also more complex versions of existing tasks, in which labor has a comparative advantage, can be created. We fully characterize the structure of equilibrium in this model, establishing how the allocation of factors to tasks and factor prices are 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. Our full model endogenizes the direction of research and development towards automation and the creation of new complex tasks. We show that, under reasonable conditions, there exists a stable balanced growth path in which the two types of innovations go hand-in-hand. Consequently, an increase in automation reduces the wage to rental rate ratio, and thus discourages further automation, encourages greater creation of more labor-intensive tasks, and restores the share of labor in national income and the employment to population ratio back towards their initial values. Though the economy is self-correcting, the equilibrium allocation of research effort is not optimal: 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 also serve to limit the increase in inequality over longer periods. Still in Progress. Comments Welcome. ∗We thank Philippe Aghion, David Autor, Erik Brynjolfsson, Chad Jones, and seminar participants at the AEA 2015, the MIT Initiative on the Digital Economy, and the NBER 2015 Economic Growth Group for their valuable comments.