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Automation, growth, and factor shares in the era of population aging

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Published on Thursday, 23 December 2021

Andreas Irmen, Professor within the Department of Economics and Management at the Faculty of Law, Economics and Finance has published a paper in the December 2021 edition of The Journal of Economic Growth entitled “Automation, growth, and factor shares in the era of population aging.”

In the paper, Prof. Irmen asks the question: How does population aging affect economic growth and factor shares in times of increasingly automatable production processes? Or, in other words, are there stronger incentives for firms to produce with robots and other labor-saving equipment if they operate in an aging society. If yes, what does this imply for the economy’s output, as measured by GDP, and what does it imply for the distribution of incomes between capitalists and workers, as measured by the labor and the capital share?

To address these issues, Prof. Irmen proposes a new macroeconomic model of automation where competitive firms perform tasks to produce output. The proposed model distinguishes between fixed capital and machines that replace workers in the performance of tasks. Hence, using more of these machines means more automation.

Prof. Irmen’s analysis demonstrates, unlike previous studies, that the main sources of population aging, i.e., longer lifespans and declining fertility, affect the incentives of firms to automate. Yet, the direction of this effect depends on the source of aging and on the considered time horizon. On the one hand, an increase in longevity reduces automation in the short run and promotes it in the long run. It boosts the growth rate of absolute and per-capita GDP in the short and the long run, while lifting the labor share in the short and reducing it in the long run. On the other hand, a declining fertility increases automation, reduces the growth rate of GDP, and lowers the labor share in the short and the long run. While in the short run, it may or may not increase the growth rate of per-capita GDP, it unequivocally accelerates per-capita GDP growth in the long run.

Recently, many economists have attempted to explain the global decline in the labour share and the concomitant increase in the capital share. Prof. Irmen’s analysis suggests that the decline in the labour share is also a long-run consequence of automation induced by population aging. However, in contrast to other studies his analysis predicts that the labour share is unlikely to fall below a socially acceptable level even if the incentives to automate become very strong.

In contemporary industrialized societies, population aging, whether due to increasing longevity, declining fertility or both, is a key driver of macroeconomic processes. Prof. Irmen’s model shows that population aging implies behavioral adjustments of households and firms that affect the incentives to automate, hence, economic growth, and factor shares, ultimately opening the door for subsequent empirical research on the subject.