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Resolving the automation paradox: falling labor share, rising wages

David Autor, B. N. Kausik

TL;DR

It is shown that declining labor share is more likely to raise wages, and it is proved that the wage-maximizing labor share depends only on the capital-to-labor ratio, implying a non-monotonic relationship between labor share and wages.

Abstract

A central socioeconomic concern about Artificial Intelligence is that it will lower wages by depressing the labor share - the fraction of economic output paid to labor. We show that declining labor share is more likely to raise wages. In a competitive economy with constant returns to scale, we prove that the wage-maximizing labor share depends only on the capital-to-labor ratio, implying a non-monotonic relationship between labor share and wages. When labor share exceeds this wage-maximizing level, further automation increases wages even while reducing labor's output share. Using data from the United States and eleven other industrialized countries, we estimate that labor share is too high in all twelve, implying that further automation should raise wages. Moreover, we find that falling labor share accounted for 16\% of U.S. real wage growth between 1954 and 2019. These wage gains notwithstanding, automation-driven shifts in labor share are likely to pose significant social and political challenges.

Resolving the automation paradox: falling labor share, rising wages

TL;DR

It is shown that declining labor share is more likely to raise wages, and it is proved that the wage-maximizing labor share depends only on the capital-to-labor ratio, implying a non-monotonic relationship between labor share and wages.

Abstract

A central socioeconomic concern about Artificial Intelligence is that it will lower wages by depressing the labor share - the fraction of economic output paid to labor. We show that declining labor share is more likely to raise wages. In a competitive economy with constant returns to scale, we prove that the wage-maximizing labor share depends only on the capital-to-labor ratio, implying a non-monotonic relationship between labor share and wages. When labor share exceeds this wage-maximizing level, further automation increases wages even while reducing labor's output share. Using data from the United States and eleven other industrialized countries, we estimate that labor share is too high in all twelve, implying that further automation should raise wages. Moreover, we find that falling labor share accounted for 16\% of U.S. real wage growth between 1954 and 2019. These wage gains notwithstanding, automation-driven shifts in labor share are likely to pose significant social and political challenges.
Paper Structure (4 sections, 1 theorem, 14 equations, 3 figures, 2 tables)

This paper contains 4 sections, 1 theorem, 14 equations, 3 figures, 2 tables.

Table of Contents

  1. Main
  2. Resolving the automation-wage paradox
  3. Validation on historical data
  4. Discussion and policy implications

Key Result

Theorem 1

Consider a family of constant-returns-to-scale production functions $Y(K,L,\lambda)$. Then: (a) The wage-maximizing labor share and the maximum wage itself depend only on the capital-labor ratio $k = K/L$. (b) Suppose there exists at least one labor share $\lambda \in (0,1)$ satisfying the first-ord

Figures (3)

  • Figure 1: Share of labor compensation in gross domestic product at current national prices in the United States, 1950--2019
  • Figure 2: Estimated Average $-\frac{\partial ln(w)}{\partial \ln(\lambda)}$ for Select Economies.
  • Figure 3: Observed and Estimated Annual Real Wage Growth by Component for Select Economies.

Theorems & Definitions (2)

  • Theorem 1
  • proof