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in "Artificial intelligence, Automation and Work" by Acemoglu and Restrepo, the authors write:

Capital accumulation: As our framework in the next section clarifies, automation corresponds to an increase in the capital intensity of production. The high demand for capital triggers further accumulation of capital (e.g., by increasing the rental rate of capital). Capital accumulation then raises the demand for labor. This may have been an important channel of adjustment of the British economy during the Industrial Revolution and of the American economy in the first half of the 20th century in the face of mechanization of agriculture, for in both cases there was rapid capital accumulation (Allen, 2009; Olmstead and Rhode, 2001).

The sentence "Capital accumulation then raises the demand for labor." is left unelaborated. I fail to understand why one should necessarily lead to the other. Can anyone explain?

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Good question! Here Acemoglu and Restrepo discuss one of the many possible effects of automation, such that automation is likely to induce additional usage of capital in the sector or additional capital accumulation, which can increase labor demand.

They elaborate on this effect on their 2018 AER paper "The Race between Man and Machine: Implications of Technology for Growth, Factor Shares, and Employment".

In a static version of their model where capital is fixed and technology is exogenous, automation reduces employment and the labor share, and may even reduce wages. Their full model endogenizes capital accumulation and the direction of research toward automation and the creation of new tasks. If the long-run rental rate of capital relative to the wage is sufficiently low, the long-run equilibrium involves automation of all tasks. Otherwise, there exists a stable balanced growth path. Stability is a consequence of the fact that automation reduces the cost of producing using labor, and thus discourages further automation and encourages the creation of new tasks. The response of capital ensures that the productivity gains from both automation and the introduction of new tasks fully accrue to labor (the relatively inelastic factor).

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  • $\begingroup$ Thank you very much for your quick and thorough reply! I got it now. $\endgroup$ – mike de beer Mar 10 at 11:11
  • $\begingroup$ I think I accepted your answer. This is my first time asking questions on this site so I didn't even know that was a thing lol. $\endgroup$ – mike de beer Mar 10 at 11:27
  • $\begingroup$ Thanks and welcome! $\endgroup$ – emeryville Mar 10 at 11:29

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