How Automation that Substitutes for Labor Affects Production Networks, Growth, and Income Inequality

Abstract

We study how advances in labor-substituting (automation) technologies affect production networks. Labor-substituting advances lower the wages of substitutable workers relative to non-substitutable workers, affecting employment in the entire economy, well beyond the production chains adopting the new technologies. As automation progresses, the production network becomes denser, increasing the centralities of producers of automation and their (direct and indirect) suppliers. The growth effects of automation emerge gradually, and the changes in income inequality and overall productivity depend on (i) alternative uses of the replaced labor, and (ii) sectoral compositions of substitutable and non-substitutable workers. These provide explanations for why today's automation is different from historical ones.

Keywords: Automation, AI, Growth, Input-Output Analysis, Inequality, Productivity, Production Networks, Reallocation of Labor, Labor Displacement, Technology

JEL Classification: D85, E23, E24, E32, F43, J31, O33, O41