Abstract
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 quantitative business cycle model with labor market search frictions, generalized to incorporate automation decisions and estimated to fit U.S. time series. In the model, procyclical automation threats create real wage rigidity that amplify labor market fluctuations. We find that this automation mechanism is 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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