Automation and the employment elasticity of fiscal policy

Abstract

This paper investigates whether automation (the use of industrial robots in production) makes fiscal policy less powerful for stimulating job creation. It posits that a fiscal stimulus will lead to fewer new jobs if the supplementary demand that it creates can be met by using more robots in production processes. Using data for 18 European countries over recent decades, including data on the use of industrial robots, our results show three main findings. First, the pace of automation for the average country in the sample has halved the sensitivity of employment to fiscal stimulus. Second, manufacturing industry employment reacts less to fiscal stimulus in the presence of rapid automation as the average substituability between labor and machines is relatively higher. Third, low-skill jobs as well as women employment are less sensitive to fiscal stimulus in the presence of rapid robot use. We conclude that the effectiveness of fiscal policy in expanding job creation faces an important challenge in a world undergoing structural changes such as the rapid pace of automation.