The Future of Labor: Automation and the Labor Share in the Second Machine Age

Cheng, Hong; Drozd, Lukasz A.; Giri, Rahul; Taschereau-Dumouchel, Mathieu; Xia, Junjie

doi:10.21799/frbp.wp.2021.11

Working Paper

The Future of Labor: Automation and the Labor Share in the Second Machine Age

Abstract: We study the effect of modern automation on firm-level labor shares using a 2018 survey of 1,618 manufacturing firms in China. We exploit geographic and industry variation built into the design of subsidies for automation paid under a vast government industrialization program, “Made In China 2025,” to construct an instrument for automation investment. We use a canonical CES framework of automation and develop a novel methodology to structurally estimate the elasticity of substitution between labor and automation capital among automating firms, which for our preferred specification is 3.8. We calibrate the model and show that the general equilibrium implications of this elasticity are consistent with the aggregate trends during our sample period.

Keywords: labor share; labor’s share in income; automation; labor demand; industrial robots;

JEL Classification: D33; E25; O33; J23; J24; E24; O25;

https://doi.org/10.21799/frbp.wp.2021.11