Elasticity of substitution between robots and workers: Theory and evidence from Japanese robot price data

Abstract

This paper examines the wage effects of the increased use of industrial robots, focusing on their role in specific tasks and international trade. I construct a novel dataset by tracking shocks to the cost of acquiring robots from Japan, termed the Japan Robot Shock (JRS), and analyze these shocks across different occupations that have adopted robots. A general equilibrium model incorporating robot automation in a large open economy is developed, and a model-implied optimal instrumental variable of the JRS is constructed to address the identification challenges posed by the correlation between automation shocks and the JRS. The study finds that the elasticity of substitution (EoS) between robots and labor is heterogeneous across occupations, reaching up to 3 in production and material moving occupations, which is significantly higher than the EoS between other capital goods and labor. These findings underscore the importance of targeted policy to help workers adapt and mitigate potential wage pressures.