As a result of technological advancement, economic growth and living standards have increased. Not every technology is equal, however. Automation can affect employment and wages very differently from technologies that increase human productivity.
It is thus critical to distinguish automation from other types of technologies and capital deepening (meaning an increase in the amount of capital and machinery used in production).
To start with, businesses can invest in machines that complement workers – think about upgrading the machines they already use. Second, firms may purchase more or better machines to perform tasks that are already automated, such as replacing an automated welding machine with an advanced robot. A (non-automated) capital deepening of this kind is generally beneficial for labor, because it increases productivity and encourages the firm to demand more labor.
But automation works differently than capital deepening because it substitutes machines for workers in the tasks they were previously performing. Automation affects the labor share – how much of a firm’s, industry’s, or economy’s revenue is spent on labor – unambiguously negatively.
By reducing the work performed by workers and increasing the work performed by capital, automation always increases the capital share and decreases the labor share. Beyond the impact of automation on employment and wages, this change has obvious distributional ramifications.