Growth in an Economy with Automation and Human Capital Accumulation

This paper presents a model of endogenous growth with directed technical change to examine the implications of automation on output growth and employability of unskilled workers. Automation occurs to replace unskilled labor with industrial robots in producing intermedi- ate varieties. This automation is partly offset by horizontal innovation that creates new varieties in which unskilled labor has employment advantage. Unskilled labor also benefits from dynamics of a labor augmenting technology that helps improve its productivity. As the key production factor, human capital takes part in every economic activity, ranging from working in research labs to educating its labor force or producing varieties. We find that over the long run, there exists a balanced growth path along which each of the production factors, robots and unskilled labor, is employed to produce a fixed range of varieties, alongside human capital. Output grows either at the exogenous rate of labor augmenting technology or at the rate of human capital accumulation in the fully endogenous model. At long- run equilibrium, automation will be strengthened if research devoted to its development becomes more efficient. However, it will be dis- couraged by an improvement in either the variety creation or labor augmenting technology or by a surge in the rate of time preference. Keywords: Automation, horizontal innovation, endogenous growth, human capital, robots, directed technological change