Automation in an estimated small open economy model

Abstract

To shed light on the causes and consequences of automation decisions, this paper introduces robots replacing workers in a small open economy model with search and matching frictions and capital, estimated for the Canadian economy. A technological factor, the automation-specific technology, drives the probability of a firm to automate and, thereby, generates productivity gains and influences the fluctuations in productivity, investment, and the labour income share. Such a technology triggers a pro-cyclical labour displacement effect that exceeds its job creation effect but the net result on unemployment is quantitatively small, rendering it a small contributing force to unemployment fluctuations. A model with automation decisions fits better the data than models without them, influences the relative importance of supply-side and labour-market sources of business cycles, yields wage rigidity, and amplifies the volatility of productivity.