Robots or Workers? A Macro Analysis of Automation and Labor Markets

Abstract

We study the implications of automation for labor market fluctuations in a Diamond-Mortensen-Pissarides (DMP) framework that is generalized to incorporate automation decisions. If a job opening is not filled with a worker, a firm can choose to automate that position and use a robot instead of a worker to produce output. The threat of automation strengthens the firm's bargaining power against job seekers in wage negotiations, depressing equilibrium real wages in a business cycle boom. The option of automation also increases the value of a vacancy, raising the incentive for job creation, and thereby amplifying fluctuations in vacancies and unemployment relative to the standard DMP framework. Since automation improves labor productivity while muting wage increases, it implies a countercyclical labor income share, as observed in the data.