Automation and low-skill labour

_ Katja Mann, Copenhagen Business School; Dario Pozzoli, Copenhagen Business School. IZA, December 2022.

Many firms in advanced economies are currently facing difficulties in recruiting labour and filling their vacancies. There are several factors contributing to the tightness of the labour markets, including restrictive immigration laws, the retirement of large baby boomer cohorts and Covid-induced exits. It has been shown that firms manage to address labour shortages by investing in automation technologies, such as industrial robots. While it is reasonable to predict that labour shortages can induce firms to adopt automation technology, there is a lack of causal evidence to support this hypothesis.

The recent IZA discussion paper “Automation and Low-Skill Labor” (2022) fills this gap by providing empirical evidence on the effect of an increase in the local supply of low-skill labour on firms’ adoption of robots, with high-quality data for Denmark. Their main hypothesis is that the inflow of non-Western migrants into Denmark since the 1980s has increased the supply of low-skill labour, lowered labour costs and thereby reduced the need for firms to automatize their jobs. As a consequence, fewer robots have been adopted in municipalities with a large share of migrant workers. Vice versa, robot adoption would then be more widespread in labour markets with a shortage of low-skill workers.

Causality in the relationship between immigration and automation is shown by estimating firm-level regressions covering the time period 1995-2019, which exploits exogenous variations in the migrant share both across time and municipalities. Specifically, the study uses the share of migrant workers via a shift-share instrument which relies on the municipalities’ share of migrants by country of origin in 1993, well before robot use became widespread.

Robots and low-skill labour are substitutes

Consistent with intuition, the study shows that a one percentage point increase in the share of non-Western migrants decreases the probability of robot adoption by 7 percent. Moreover, an increase in the share of non-Western immigrants is associated with a decline in the value of imported robots. If low-skilled workers and robots are substitutes, then a firm’s decision whether to adopt a robot instead of employing a human worker will depend on relative factor prices. Indeed, the analysis shows that the average value of imported robots within a municipality is positively correlated with immigrant workers’ average wages.

The findings carry important policy implications at a time when many countries have restrictive immigration policies in place and are experiencing labour shortages (especially in terms of low-skilled workers) due to the retiring of large baby boomer cohorts. The key finding that immigration and robot adoption are substitutes suggests that automation technology is expected to become more widespread over the next decades in response to labour shortages. According to the researchers, it is therefore important to implement policies ensuring that young workers entering the labour force can collaborate, rather than compete, with robots. Retraining measures should also be designed in order to help older workers’ transition into non-automatable tasks.

The full study can be read here.

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