Sharing the gains of automation

For many observers, automation has been responsible for both strong economic growth and rising inequality in many countries in recent decades. Automation raises productivity, but it can exacerbate inequality. This is because it replaces low-skilled workers and helps owners of capital earn bigger monopoly rents. And with the advent of next-level automation in the form of robots, the challenge is more pressing than ever.

In recent IMF staff research, however, we find that the right fiscal policies—government spending and tax policies—can improve the trade-off between economic growth and inequality. But not all fiscal policies are equally effective in this regard.

We studied several comprehensive fiscal policy packages to address the growth-inequality tradeoffs in the era of automation. Inequality can generally be reduced by redistributing some of the gains of automation from winners (owners of capital and skilled workers) toward losers (generally low-skilled workers, who suffer from job loss and low wages). That said, redistribution policies generally require additional taxation, which can depress investment and labor supply and may thus reduce output. We discuss the pros and cons of various policy packages and seek to define the relevant growth-inequality trade-offs for each of them.

For our analysis, we captured the defining features of automation: replacing low-skilled workers and raising the productivity, profits, and thus the market power of its adopters. We link corporate market power to the degree of automation based on empirical evidence. Specifically, we assume a positive correlation between the firms’ price markup (a measure of market power) and their usage of robots (a proxy for automation), calibrating the relationship using US data. Intuitively, the higher the robots per worker, the higher the productivity, and the higher the profits. For example, large firms can take advantage of owning the platform they established and acquiring other firms in the same sector to obtain high market shares and large markups.

Our research looks at the growth-inequality tradeoffs through the prism of three tax-and-redistribute packages: a tax on capital income, a tax on excess corporate profits (the markup tax), and a tax on robots.

IMF