The Best of Times, the Worst of Times: Macroeconomics of Robotics
FIRST DRAFT
Introduction
There are two opposing narratives of the “robot revolution,” by which I mean the rising productivity and falling costs of smart ICT-enabled systems, including robots, artificial intelligence, the Internet of Things, remote monitoring and sensing, and other ICT-based systems. In the positive narrative, highly productive robots do the work of humans, thereby raising output, productivity, leisure, and wellbeing. In the negative narrative, robots eliminate jobs, raising unemployment while lowering real wages and wellbeing. Not only are both narratives coherent; they may occur simultaneously, with richer households boosted by robots while poorer households are immiserized. This brief note clarifies these opposing outcomes.
At the core of robot economics is a technological shift towards more capital- intensive production as robots (and other ICT-based systems) substitute for labor. The result is that output, productivity, and profits rise while wages decline. A combination of rising productivity with falling wages is unusual in modern economic history. Productivity and wages have tended to rise together. Indeed, one of the stylized facts of long-term growth has been the stability of the labor share of income, s = wL/Y, where s is the real wage, Y is real output, and L is labor input. Since s may be rearranged as s = w/(Y/L) we see clearly that the stability of s
means that wages W and productivity Y/L move in parallel.
In recent years the labor share of income has been in decline in many high-income economies, though both the causes and magnitude of the decline are much debated. I would suggest that part of the decline is a manifestation of the robot revolution. Part or even most of the decline in the labor share might be unrelated to robots; one study argues that the recent decline is due to the rise in the share of housing services in GDP.
If robots indeed cause a rise in productivity and profits with a fall in wages, the macroeconomic implications would be quite different from past productivity increases. The traditional optimism that productivity gains broadly improve living standards would have to be significantly qualified. In a life-cycle perspective, young people mostly own labor while older people mostly own financial wealth. Thus, by pushing up profits while depressing wages, the robot revolution would tend to favor the old generation relative to the young generation and all future generations (whose main endowment will be their labor income). Moreover, since the young are net savers while the old tend to be net dis-savers, a shift of income towards the old and away from the young would tend to lower the national saving rate.
The net welfare effects would be complicated. The capital-owning older generation alive at the time of the robot revolution would certainly benefit. Matters would be more complicated for the young. On the one hand, their wages decline. On the other hand, the rate of return on saving goes up. The net welfare effect can be positive or negative, depending on the household’s time rate of discount (among other factors). With a high enough rate of pure time discount, that is, a low weight on future consumption, the adverse wage effect dominates the positive effect of a higher return on saving, so that young workers suffer a decline in lifetime wellbeing.
Since the robot revolution raises national output, the real-income gains of the old wealth holders is greater than the wage losses of the young workers. In principle, the older generation can therefore compensate the young workers in order to keep both the old and young generations better off than before the robot revolution. This kind of transfer can happen in two ways. First, older people might increase their wn voluntary intra-familial bequests to their children, either through higher transfers while they are still alive (inter vivos transfers) or higher bequests upon their death. Alternatively, the government might tax some of the capital windfall of the old generation to transfer income to the young workers.
Intra-family transfers from the old to the young would be more likely to occur in richer households since bequests are a “luxury” good (that is, the share of bequests in household income rises with income). As a result, richer households are more likely than poorer households to buffer the losses of their children through bequests. The implication is that the robot revolution is likely to increase the inequality of income and wellbeing by making the rich richer and the poor poorer.