Resolving the automation paradox: falling labor share, rising wages

Abstract: A central socioeconomic concern about Artificial Intelligence is that it will lower wages by depressing the labor share - the fraction of economic output paid to labor. We show that declining labor share is more likely to raise wages. In a competitive economy with constant returns to scale, we prove that the wage-maximizing labor share depends only on the capital-to-labor ratio, implying a non-monotonic relationship between labor share and wages. When labor share exceeds this wage-maximizing level, further automation increases wages even while reducing labor's output share. Using data from the United States and eleven other industrialized countries, we estimate that labor share is too high in all twelve, implying that further automation should raise wages. Moreover, we find that falling labor share accounted for 16\% of U.S. real wage growth between 1954 and 2019. These wage gains notwithstanding, automation-driven shifts in labor share are likely to pose significant social and political challenges.