Automation, Bargaining Power, and Labor Market Fluctuations

Author(s): Sylvain Leduc and Zheng Liu

We argue that the threat of automation weakens workers’ bargaining power in wage negotiations, dampening wage adjustments and amplifying unemployment fluctuations. We make this argument based on a business cycle model with labor market search frictions, generalized to incorporate automation decisions. In the model, procyclical automation threats create endogenous real wage rigidity that amplifies labor market fluctuations. The automation mechanism is consistent with empirical evidence. It is also quantitatively important for explaining the large volatilities of unemployment and vacancies relative to that of real wages, a puzzling observation through the lens of standard business cycle models.

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Article Citation

Leduc, Sylvain, and Zheng Liu. 2023. "Automation, Bargaining Power, and Labor Market Fluctuations," Federal Reserve Bank of San Francisco Working Paper 2019-17. Available at https://doi.org/10.24148/wp2019-17