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Automation, labor productivity and

employment – a cross country


comparison*
Lene Kromann, Jan Rose Skaksen, Anders Sørensen

CEBR, Copenhagen Business School

1. Introduction
Over the last three decades a growing group of manufacturing firms in the industrialized world have been
spending enormous resources in upgrading their production technology to cope with the increasing
competition from non industrialized countries where production costs are much lower. As a result of this,
there has been a transition in the manufacturing sector from labor intensive production to capital intensive
flexible specialization in the industrialized world. For instance, in the United States the workforce employed
in the manufacturing sector has dropped sharply from 20 percent in 1979 to about 11 percent in 2006
(Deitz and Orr, 2006)). At the same time the number of robots has increased to 6.5 million overall
worldwide in 2007. Around 1 million of these are used in the manufacturing industry.

Automation is labor saving technological change which is supposed to increase labor productivity, but does
it create or destruct jobs? In this paper we use cross country and cross industry data on the use of industrial
robots to analyze how automation affects productivity and employment in manufacturing.

Theoretically, it is an open question whether automation leads to a higher or lower employment level as
there are two opposite effects in play (see e.g. Van Reenen, 1997). On the one hand, automation implies
that labor input per unit of output decreases, i.e., labor productivity increases, which implies a lower
employment level. On the other hand, automation may also reduce the marginal cost of production, which,
in turn, gives rise to a higher output level. This expansion is likely to increase employment.

Analyses of the implications of automation can be conducted at different levels of aggregation, and the
conclusions may depend on the exact level of aggregation. At the most aggregate level, a whole economy,
automation is likely to reduce employment in the manufacturing industry, since overall less labor input is
used to produce the same amount of products. The labor released from the manufacturing sector may be
absorbed in other parts of the economy. It is for example often argued that the opportunities for
increasing productivity are not as good within service production as within goods production. Moreover,
since the income elasticity of demand for services is relatively high, more labor resources are going to be

*
This paper is a part of the AIM project (www.aimprojekt.dk). We are very grateful to Industriens Fond for financial
support, and to Philip Rosenbaum and Morten Eskild Friehling for very efficient research assistance.

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tied into low productivity service production, and less labor is “needed” in high productivity manufacturing
production. This effect is often termed Baumol’s cost disease (see e.g. Baumol and Bowen,1966, and
Eichengreen and Gupta,2009).

In contrast, at the firm level, most empirical analyses find that technological innovations lead to higher
employment. The firm level analyses furthermore show that it is the most productive firms that are more
likely to survive and expand, see for example Syverson (2011). However, within an industry, growth in one
firm may have a negative impact on the growth in other firms. In industry analyses the opposite direct and
indirect effects are aggregated implying that the results become more ambiguous in studies based on an
intermediate level of aggregation (see e.g. Pianta, 2003, and Van Reenen, 1997). Thus, analyses conducted
at different levels of aggregation provide complementary information with respect to the implications of
new technology. The focus in this paper is on the industry level, which is interesting because policy
initiatives to improve productivity are often targeting an industry and not specific firms.

The typical measures of technological change in economic analyses are expenditures on R&D, patents, ICT
capital1 or the answers to survey questions on innovation activities, see for example Hall (2011) and Hall et
al (2010). The measure of technological change in our study is the use of industrial robots at the industrial
level which is a more direct measure of technology. Moreover, industrial robots are technologies directly
targeted at saving labor input.2 These data are collected by the International Federation of Industrial
Robotics (IFR), and they provide data on 40 countries. There is a lot of variation in the use of industrial
robots, both between countries and between industries. The automotive industry is by far the most robot-
intensive industry, whereas e.g. the textile industry has the least intensive use of robots. Japan and
Germany are the countries making most intensive use of robots, whereas it is used at a much lower extend
in e.g. United Kingdom. This variation between industries and countries are used to estimate how labor
saving technological changes affect productivity and employment at the industry level of a country.

We estimate a simple model and find that automation has a significant impact on labor productivity; both
in the short and in the long run. With respect to employment, we find that automation tends to lower
employment in the short run, whereas it tends to raise employment in the long run. In contrast to the
statistically significant and positive productivity effects, the employment effects of automation change over
time and are barely significant.

The estimated model is used to predict by how much productivity in Manufacturing would increase if all
industries in a country had the highest found level of robot-intensity for each of the industries. It turns out
that this would give rise to an economical significant increase in productivity in all countries. The smallest
increase would take place in Germany and Japan with a change of 8 percent, whereas the largest increase
would be in UK with as much as 22 percent. Denmark is an intermediate case with a 15 percent larger
productivity level. In the short run employment would decrease, but in the long run it would increase
between 3 percent in Germany and Japan and 7 percent in UK. Again Denmark is an intermediate case with
a long run increase of 5 percent in employment.

1
ICT: Information and communication technologies.
2
According to our best knowledge, this is the first study that includes industry robots at the industry level. Based on
micro data studies on productivity and the use of industry robot exists, see for example Bartel, Ichniowski, and Shaw
(2007) who find that better CNC machining centers raise productivity in the valve manufacturing industry by
shortening setup time, production time, and inspection time.

2
These calculations show that there are large potentials for increasing productivity through more intensive
use of automation. Even though the productivity potential of automation is large it is likely to be under-
evaluated because they are based on the technological level and dissemination of the leading industries
today. In the future it will also be possible to further automate the presently “best performing” countries.

The rest of the paper is structured as follows. In the next section, we set up a simple theoretical model
illustrating employment and productivity implications of automation. In section 3 we present the data, and
in section 4 the empirical analysis. In section 5, we discuss the economic (quantitative) importance of our
results. Finally, the conclusion is given in section 6.

2. Theory
In this section we introduce a simple stylized model to guide the empirical analysis in the following
sections.

By following Van Reenen (1997), we consider a perfectly competitive industry operating under a constant
returns, constant elasticity of substitution production function of the form:

/

  
/ 
/  1

where Q is output, N is employment, and K is capital. A is labor augmenting Harrod-neutral technology, and
σ is the elasticity of substitution between capital and labor.

We assume that automation mainly gives rise to an increase in A. An increase in A implies that the same
amount of labor services (AN) requires less input of labor (N). Using that the real wage is equal to the
marginal product of labor, it follows that employment becomes

log   log   /   1 2

Labor productivity is given as:

    /    1 3

If the elasticity of substitution is low (σ < 1), labor productivity is increasing in A (for given wages). As a
mirror image, employment is decreasing as long as output and wages are unchanged. The reason being that
the increase in A implies that less labor is needed to achieve a given level of labor services (AN), and
because of the low degree of substitution between labor and capital, there is only a small increase in the
total use of labor services.

In contrast, if the elasticity of substitution between capital and labor is high (σ > 1), the labor productivity is
decreasing in A (for given wages), and employment is increasing (for a given level of production). In this
case the elasticity of substitution between capital and labor is sufficiently high that the employment
increase due to the shift from capital services to labor services dominates that less labor is needed to
achieve a given level of labor services.

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The labor demand in (2) is derived for a given level of output. By using that the marginal product of capital
equals the cost of capital, output can be substituted out of the labor demand function, and it turns out
that:

log     1  / log  log  4

where R is the user cost of capital.

We see that, for a given level of capital (and for given wages and user cost of capital), employment is
increasing in A if the elasticity of substitution is high, but decreasing if the elasticity of substitution is low.
Hence, the qualitative implications of automation on employment are similar to what we found above
when considering the case of a given level of production. We may conclude that for a given capital stock,
the output responses are not sufficiently strong to change the qualitative results derived for a given level of
production.

Until now it has been assumed that, either the level of production, or the level of capital is fixed. Van
Reenen (1997) emphasizes that, in the long run, output as well as capital is endogenous. Moreover, if
automation reduces the long run marginal cost of production, both output and investments increase. The
size of the increase in output depends on the price elasticity of demand, but the response of the demand
tends to increase employment. Hence, even if employment tends to decrease for a given level of output or
capital, it may still be the case that the output increase is sufficiently high that the net effect in the long run
is an increase in employment.

As shown above, the size of the elasticity of substitution between capital and labor has important
implications for the quantitative as well as the qualitative impact of automation on productivity and
employment. There are many studies seeking to estimate the elasticity of substitution, and there is a lot of
variation in the estimated values. However, most studies find that the value is below 1 (see e.g. León-
Ledesma et. al., 2010). Hence, there seems to be most support to the results that automation increases
productivity, but decreases employment for a given level of production or a given level of capital. In the
following, we proceed with the hypothesis that this is the case. More specifically, the hypotheses of our
study are:

1. Automation increases labor productivity; both in the short and in the long run.
2. Automation decreases employment in the short run.
3. Automation increases employment in the long run.

The first hypothesis simply requires that the elasticity of substitution is below 1. The second hypothesis
further reflect that in the short run output and/or capital is relatively inflexible. Finally, the third hypothesis
assumes that there is an output response in the long run counteracting the tendency for employment to
decrease in the short run.

3. Data
Our basic source of data is EU-KLEMS (see O’Mahony and Timmer, 2009). However, as a measure of
automation, we use data on the stock of industrial robots. These data are provided by the International
Federation of Robotics (IFR), see IFR (2011). IFR applies the definition of a manipulating industrial robot

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given by the International Organization for Standardization (ISO 8373) which is: An automatically
controlled, reprogrammable, multipurpose manipulator programmable in three or more axes, which may be
either fixed in place or mobile for use in industrial automation applications. IFR collects the data from the
producers of robots. They provide both data on shipments (sales) of robots to industries in different
countries, and on the operating stock of robots. In calculating the operating stock, it is assumed that the
average operating service life of an industrial robot is 12 years.

By merging the IFR robot data with the EU-KLEMS, we get a dataset for a number of countries and
industries. When our analysis requires information on the stock of industrial robots, we have a dataset with
9 countries3 and 11 industries from (ISIC rev. 4 classification)4, for the period 2004 to 2007. When we only
need information on shipment of industrial robots, we have a dataset with 14 countries5 and 11 industries.

Our measure of automation is the number of industrial robots per million hours of work. Figure 1 shows
how this variable is distributed across countries in 2004, 2007 and 2010 for total Manufacturing.6

Figure 1. Total country stock of industrial robots


3,5
Robots per million working hours

3 2004
2007
2,5
2010 (Estimate)
2

1,5

0,5

0
DNK JPN* FIN FRA GER ITA ESP SWE UK

*Data for JPN 2007 is missing therefore data for 2006 is graphed instead

3
The countries in the study are Japan, Germany, UK, France, Italy, Spain, Sweden, Norway, Finland, and Denmark.
4
Food, beverages and tobacco (10-12); textiles, leather, wearing apparel (13-15); wood and wood products (16);
paper and paper products, publishing & printing (17-18); plastic and chemical products (19-22); glass, ceramics, stone,
mineral products n.e.c. (23); metal and machinery (24,25,28); electrical equipment (26,27); automotive (29); other
transport equipment (30); all other manufacturing industries. EU-KLEMS applies ISIC rev 3 classification, but it is
possible to match the industries in the two classifications.
5
Besides the countries listed in footnote 1, it is Austria, Belgium, The Netherlands, Czech Republic, Slovak Republic,
Hungary.
6
The 2010 numbers are predicted in the sense that we only have data on the number of industrial robots per million
working hours between 2004 and 2007. However, we do know how the stock of industrial robots develops up to 2010.
For each industry in each country we estimate the relationship between the stock of robots and the robots per million
working hours for the period 2004 to 2007. This relationship is used to predict the stock of robots per million working
hours for 2010.

5
The variation across countries is large. Germany and Japan are by far the most robot-intensive economies,
whereas the UK is the least robot-intensive. In all countries apart from Japan and the UK there is a
tendency for the stock of robots to increase.

The use of robots not only varies across countries, it also varies across industries as shown in Figure 2. The
aggregate stock of industrial robots per million working hours in the 9 countries is presented for 10
aggregate industries.

Figure 2. Total industry stock of robots


50
Robots per million working hours

45
40
2004
35
30 2007
25 2010 (Estimate)
20
15
10
5
0
Transport Equipment
Electrictronic Equipment
Chemical products

Glass, Ceramics, Stone


Food, Tobacco

Paper, Printing

Metal, Machinery

All Other
Wood
Textile, Leather

It is clear from Figure 2, that transportation equipment is far more robot-intensive than any other industry.
The industry has an intensity that is around 9 times larger than the metal and machinery industry. The
intensive use of robots in transportation equipment partly explains Germany’s and Japan’s dominating role
in industrial robots as the automotive industry is included in transport equipment, and this is by far the
most robot intensive industry. One important observation from the figure is a decrease in the robot-
intensity in several industries between 2007 and 2010. This is mainly due to the big drop in the use of
robots in Japan as is evident in Figure 1.

In the analysis below, to control for unobserved heterogeneity, first -difference estimations is used.
Furthermore, in order to reduce the importance of random yearly changes, we use long differences
between 2004 and 2007. Ideally, data on the change in the stock of industrial robots should be used in the
analysis. However, we can include 5 additional countries in the sample by accepting a slight modification.
Consequently, we use total shipment of industrial robots to an industry in a country over the period 2004 to
2007 per million working hours in 2004 as the measure for the change in the stock of industrial robots. The
difference between this measure and the change in the stock of robots is mainly that the shipment
measure does not take into account that some older robots are taken out of use. Figure 3 shows the total
shipment per million working hours for the different industries.

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Figure 3. Total shipment of industrial robots
18
Shiipment pr. million workin hours

16
2004-2007
14
12 2007-2010
10
8
6
4
2
0 Chemical products

All Other
Food, Tobacco

Paper, Publishing

Glass, Ceramics, Stone


Textile, Leather

Wood, Furniture

Electrictronic Equipment
Metal, Machinery

Transport Equipment

It is mainly the most automated industries like the chemical industry, the electronic equipment industry
and the transportation equipment industry that invest in further automation. However, it also seems to be
the case that industries like food products and the metal and machinery industry are starting to upgrade.

Our measure of labor productivity is value added per working hour. Employment is measured in working
hours, and capital as is total compensation to capital. It can be argued that the use of ICT-capital is another
measure of automation similar to our robot-measure. In EU-KLEMS there are data on the use of ICT-capital
defined as computing equipment, communications equipment and software. To test whether the use of our
robot-measure is really another measure of automation than the ICT-capital measure, we include ICT-
capital services per million working in our analysis.

In some of our estimations, we use the cross countries variation in the levels of our data. This requires that
the cross country variables are measured in comparable units. Therefore, we use PPP corrected variables
(see also Inklaar and Timmer, 2008).

In Table 1 we summarize the differences in productivity and employment performance in the 9 countries
included in the main part of our analysis. The presented numbers are the estimated coefficients to country
dummies in regressions that include country fixed effects as well as industry fixed effects. Germany is the
base country. Similarly, Table 2 reports the variation over industries given by the estimated industry
dummies. The metal and machinery industry is the base industry.

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Table 1. Summary statistics for country variation
Labor productivity Labor productivity growth from 2004 to 2007 Employment Growth in employment
GER (base) 1.00 0.05 1.00 1.77
DNK 0.97 0.05 0.08 3.67
ESP 0.93 0.05 0.59 1.82
FIN 1.09 0.09 0.07 2.00
FRA 1.04 0.06 0.70 2.35
ITA 0.95 0.01 0.81 1.35
JPN 0.92 -0.01 2.05 0.97
SWE 1.09 0.17 0.13 3.17
UK 1.00 0.11 0.88 0.65
Note: the numbers are estimated coefficients to country dummies in regressions with the column variable at the left hand side and
country as well as industry dummies at the right hand side. In the labor productivity and working hour columns, the coefficient for
Germany is normalized to one.

It is evident that Japan on average is 8 percent less productive than Germany, whereas Finland and Sweden
are almost 10 percent more productive than Germany. Sweden and Finland have had a quite large
productivity increases during 2004 and 2007 (17 and 9 percent), whereas Japan has experienced a drop in
productivity of 1 percent. With respect to working hours overall in the economy, Japan is twice as big as
Germany, whereas Denmark supplies a number of working hours equal to 8 percent of the working hours in
Germany. These numbers obviously reflect the size of the economies. Finally, there has been an increase in
the number of working hours in all countries; the largest effect is in Denmark (3.7 percent) and the smallest
effect in Japan (1 percent). This may reflect that 2004 to 2007 is a global upturn period.

Table 2. Summary statistics, industry variation


Labor productivity Labor productivity growth from 2004 to 2007 Employment Growth in employment
Metal, Machinery (Base) 1.00 0.12 1 1.97
Food, Tobacco 0.91 0.06 0.49 0.95
Textile, Leather 0.85 0.05 0.22 -3.90
Wood, Furniture 0.88 0.14 0.10 -2.14
Paper, Publishing 0.97 0.06 0.32 -0.97
Glass, Ceramics, Stone 0.92 0.11 0.15 1.90
Electrictronic Equipment 1.12 0.12 0.46 0.85
Transport Equipment 1.01 0.08 0.38 2.73
Chemical products 1.20 0.16 0.38 0.44
All Other 0.94 0.14 0.19 1.44
Note: numbers are estimated coefficients to industry dummies in regressions with the column variable at the left hand side and
country as well as industry dummies at the right hand side. In the labor productivity and working hour columns, the coefficient for
metal and machinery is normalized to one.

It is evident from Table 2, that labor productivity in the textile industry is 85 percent of the productivity
level of metal and machinery, while the productivity in the chemical industry is 120 percent of the base
industry. The productivity within the textile industry has grown 5 percent during 2004 and 2007, while it
has grown 16 percent in the chemical industry. Moreover, the size of the textile industry is 22 percent of
the metal and machinery industry, while the size of the chemical industry is 38 percent of the metal and
machinery industry in terms of working hours. Finally, employment has decreased 4 percent in the textile
industry, while it has increased 0.4 percent in the chemical industry.

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4. Empirical results
In this section we estimate the relationship between productivity, employment and automation as
measured by industrial robots. As suggested in section 2, the employment effects of labor saving
technological progress may depend on the time perspective. Therefore ,we consider both the long run and
the short run. In the long run, it is more likely that labor cost reductions turns into a higher production than
what is the case in the short run. In this case the employment effect of automation will be more favorable
in the long run than in the short run. Therefore, in the following we distinguish between the long run and
the short run effects.

Long run effects of automation


The model is estimated in log-levels to identify long run effects of automation. Hence, it is assumed that
the cross country differences in log-levels reflect the long run effects of differences in the explanatory
variables. More specifically, we estimate how the stock of industrial robots affects productivity and
employment by using the cross--country and cross--industry variation,. The stochastic form of equations
(2) and 3 are

 !"  # !"  $%&%' !" (


) *+,
!" (- .  / !" 0 0! 0" 1 !" 5

# !"  3%&%' !"  4


.  / !" β- ) !" 46 ) *+,
!" 0 0! 0 7 !" 6

where lower case letters denote logs. 0 , 0! , and 0" are full sets of industry, country and time dummies,
respectively. These dummies control for unobserved heterogeneity for industries and countries and for
unobserved time variation. ROBOTist is the use of industrial robots per million working hours in: industry i,
country s and period t. 1 !" and 7 !" are white noise terms. In equation (4) the user of cost of capital affects
labor demand. But, as far as there are differences in the user cost of capital across countries, the effects of
these are captured by the fixed effects, if these differences are constant over time. The use of industrial
robots is one measure of automation, but automation is also closely related to the use of ICT-capital.
Therefore, as a robustness check we also include ICT capital per million working hours.

In the theory section, it was argued that there may be a positive long run employment response to
automation if the output response to automation is sufficiently strong. However, for a given level of
production or a given level of capital, the employment effect of automation is negative.7 To test whether
this is the case, we run regressions without the inclusion of capital as well as regressions where capital is
included as an explanatory variable.

In equation (5) it is assumed that wages affect productivity as there may be a movement along a given
labor demand function. However, there is a reverse causation problem because productivity affects wages.
Similar in the labor demand function, it is assumed that wages affect the labor demand, but in the labor
market equilibrium, labor demand also affect wages. To circumvent these problems of reverse causation,
we use wages lagged 12 years as instruments for current wages. The lag of 12 years is chosen, because this
is the operating service life time of an industrial robot according to the data source for industrial robots.

7
If it is further assumed that the elasticity of substitution between capital and labor is below 1.

9
In Table 3, we report the results from estimating the productivity equation (5), and in Table 4 the results
from estimating the labor demand equation (6).

Table 3. Long run effects of automation on productivity


n-q n-q n-q
0.015*** 0.015*** 0.009***
Robot
-0.003 -0.003 -0.002
0.666***
w-p
-0.089
0.022*** 0.023***
k_ict
-0.004 -0.004
N 350 350 350
R-squared 0.66 0.71 0.77
Note: Full set of industry, country and time dummies. Numbers in parentheses are standard
errors. ***, ** and * indicate significance at 1 percent, 5 percent and 10 percent, respectively.

The use of industrial robots gives rise to a significant increase in labor productivity. The effect is robust to
the inclusion of ICT-capital, and wages as explanatory variable. This is evident in Columns 2 and 3. Both the
wages and the ICT-variable have significant impacts and with the expected signs. In Column 2, ICT-capital is
introduced in addition to industrial robots and it is evident that the coefficient to ROBOT is unaffected. This
is an interesting result as it reflects that K_ict and ROBOT measure different types of technology use. While
ROBOT measures the intensity of industrial robots that to a high extent embodies ICT technology in the
form of, e.g., computerized operating systems and the like, K_ict is constructed on the basis of recorded
ICT-investments. The ICT-investments are recorded in three asset types: computing equipment,
communications equipment and software. These categories do not capture ICT-technology embodied in
industrial robots. These asset types are more likely to capture computerization in support functions at the
industry level, where support functions refers to ICT use in for example accounting, distribution, and
inventory control. In Column 3, the variable for real wages, w-p, is included leading to a fall in the
coefficient on ROBOT. The coefficient is, however, still positive and significant.

Table 4. Long run effects of automation on employment


n n n
0.005 0.005 -0.003
Robot
-0.003 -0.003 -0.001
-0.172**
w-p
-0.068
0.417***
k
-0.024
0.004 -0.011***
k_ict
-0.003 -0.001
N 350 350 343
R-squared 0.94 0.94 0.98
Note: Full set of industry, country and time dummies. Numbers in parentheses are standard
errors. ***, ** and * indicate significance at 1 percent, 5 percent and 10 percent, respectively.

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The results for employment are presented in Table 4. The table shows that automation has a positive, but
insignificant effect at the 10 percent significance level. The positive sign is quite robust as long as capital is
not included as an explanatory variable. If the measure for the capital stock is included, automation has an
insignificant and negative effect on employment. These results are in accordance with the predictions from
the theory section that, for a given capital stock, automation decreases employment. Taking the response
of capital (and output) into account automation may give rise to an increase in employment.

Short run effects of industrial robots


The model is estimated in long differences to identify short run effects of automation. Hence, we consider
how the change in the stock of industrial robots affects productivity and employment. The stochastic form
of equations (2) and (3) are:

∆ !  # !   $∆%&%' ! (
∆) *+,
! (- ∆.  / ! 0 0! 1 ! 7

∆# !  3∆%&%' !  4
∆.  / ! β- ∆ ) ! 46 ∆) *+,
! 0 0! 1 ! 8

Since investments in automation probably affect labor productivity and labor demand with a lag even in the
short run, we only consider a three year difference of data. Hence, the differenced variables are the values
in the last year in our data set (2007) minus the values in the first year (2004). The results from estimating
(7) are presented in Table 5, whereas the estimation results from (8) are presented in Table 6.8 As for the
long run model we use a full set of industry and country dummies, whereas we disregard time dummies as
there is no time dimension.

Table 5. Short run effects of automation on productivity


Δ(q-n) Δ(q-n) Δ(q-n)
0.013** 0.008** 0.009**
Δrobot
-0.005 -0.004 -0.004
0.262**
Δ(w-p)(IV)
-0.099
0.023*** 0.022***
ΔK_ict/working hours2004
-0.004 -0.004
N 150 121 121
R-squared 0.42 0.58 0.6
Note: Full set of industry, country and time dummies. Numbers in parentheses are standard
errors. ***, ** and * indicate significance at 1 percent, 5 percent and 10 percent, respectively.

The productivity effect of industrial robots is basically the same as in the long run (see Table 3). Including
ICT-capital implies that there is a decrease in the estimated impact on productivity of robots but the impact
remains statistically significant.

8
As discussed in section 3, we use total shipment of industrial robots to an industry in a country for the years 2004 to
2007 per million working hours in 2004.

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Table 6. Short run effects on employment
Δn Δn Δn
-0.007* -0.006 -0.007*
Δrobot
-0.004 -0.004 -0.004
-0.029
Δ(w-p)(IV)
-0.084
0.001***
Δk
-0.0004
-0.0003 -0.003**
ΔK_ict/working hours2004
-0.001 -0.001
N 150 121 121
R-squared 0.64 0.63 0.63
Note: Full set of industry, country and time dummies. Numbers in parentheses are standard
errors. ***, ** and * indicate significance at 1 percent, 5 percent and 10 percent, respectively.

As predicted by the theory, the short run employment effect of automation is negative. The reason being
that, in the short run, the output effect of automation is not sufficiently large to dominate the labor saving
effect of automation. The negative short run employment effect seems to be quite robust to the inclusion
of wages and ICT-capital in the estimations.

5. The economic importance of industrial robots


The main result of section 4 is that automation gives rise to a statistical significant increase in labor
productivity; both in the short run and the long run. Furthermore, automation was found to reduce
employment in the short run, whereas it raises or leaves employment unaffected in the long run. Whereas
section 4 documented the statistical significance of automation, this section considers the economic
importance of automation. One way to evaluate the economic importance of automation is by considering
what the implications would be, if a specific industry in a specific country had as many industrial robots (per
million working hour) as the industry in the country where the number is highest. To get the most updated
number, our point of departure is the degree of automation in 2010. However, the 2010 numbers for
industrial robots per million working hours are predicted, based on data for the stock of robots for 2010
(see footnote 4).9

The first step is to rank countries in all industries. Table 7 shows the ranking in 2010. The number 1 refers
to the country with the highest robot-intensity within a given industry. For example Finland has the highest
robot intensity in Food production.

9
We have made the same analysis using data for 2007, and the results are very similar.

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Table 7. Ranking of countries with respect to industrial robots per million working hours, 2010
Japan Germany UK France Italy Spain Sweden Finland Denmark
Food, Tobacco 9 4 8 6 7 5 2 1 3
Textile, Leather 9 3 7 4 6 5 8 2 1
Wood, Furniture 9 2 8 7 6 4 3 5 1
Paper, Publishing 5 2 9 4 6 8 7 1 3
Chemical products 4 3 9 7 1 8 5 2 6
Glass, Ceramics, Stone 7 1 9 3 5 6 8 4 2
Metal, Machinery 5 4 9 7 6 8 2 3 1
Electrictronic Equipment 1 4 9 8 6 7 5 2 3
Transport Equipment 3 1 7 4 2 5 6 8 9
All Other 1 2 9 8 7 3 5 4 6

Table 7 presents the full ranking. It is seen that there is a lot of variation over industries with respect to the
highly ranked country. Germany is highly ranked in all industries. This is in contrast to Japan that has a high
ranking in a few industries and a low ranking in the remaining industries. Spain and in particular UK have
low rankings basically in all industries. The Nordic countries have in general a relatively high ranking, and
for example Denmark is the leading country within metal and machinery; textiles, leather and wearing
apparel and wood and wood products.

For each industry we apply the highest ranked country as “best performance”. Then, we are able to predict
how productivity and employment would have been in each industry within a country the actual measure
of robot-intensity was substituted with the intensity of the “best performance”. The predicted values are
determined using the estimated productivity and employment effects of industrial robots established in
section 4. The exact values that come out of this exercise depend on the applied parameter values. In the
following, we apply the parameters from the estimations without other control variables than the ROBOT
variable and fixed effects10. These parameter values can be interpreted as the effects when all other
variables are endogenous, i.e., the reduced form effects. Table 7 reports the productivity effects, whereas
the short and long run employment effects are presented in Table 9 and Table 10, respectively.

Table 8. Productivity change if automation as in the most automated country


Best Japan Germany UK France Italy Spain Sweden Finland Denmark
Food, Tobacco FIN 13.7% 8.7% 13.7% 11.4% 11.7% 11.2% 7.1% 0.0% 7.4%
Textile, Leather DNK 9.7% 8.8% 9.7% 9.3% 9.6% 9.5% 9.7% 8.6% 0.0%
Wood, Furniture DNK 21.5% 1.2% 21.0% 20.4% 19.8% 18.7% 17.4% 19.7% 0.0%
Paper, Publishing FIN 2.1% 1.8% 2.8% 2.0% 2.3% 2.5% 2.5% 0.0% 1.9%
Chemical products ITA 13.0% 12.2% 29.4% 22.2% 0.0% 24.3% 19.6% 10.2% 20.7%
Glass, Ceramics, Stone GER 8.2% 0.0% 9.6% 6.7% 7.2% 7.7% 8.5% 6.8% 4.0%
Metal, Machinery DNK 5.5% 5.1% 11.7% 8.7% 6.2% 8.7% 1.0% 3.7% 0.0%
Electrictronic Equipment JPN 0.0% 16.8% 24.2% 22.5% 22.2% 22.3% 20.3% 13.9% 16.8%
Transport Equipment GER 15.9% 0.0% 76.3% 28.5% 8.1% 36.0% 65.8% 80.2% 81.4%
All Other JPN 0.0% 27.9% 41.3% 40.0% 39.3% 38.8% 39.3% 39.0% 39.6%
Total 8.1% 8.0% 22.3% 15.4% 10.5% 16.3% 15.7% 14.9% 15.2%
Note: The “Total” is the employment weighted average of the productivity change in all industries.

10
In the productivity predictions we use the parameter value 0.015; in the short run employment predictions, we use
the parameter value -0.007; and in the long run employment predictions, we use 0.005.

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The gains in productivity from introducing best performance vary over industries. In general, however, the
gains are quite large. The smallest gains are in Germany and Japan, while UK has the largest gains. Despite
that Denmark is the best performing country within three industries it is still possible to increase average
productivity within the manufacturing sector by 15 percent by copying best performance in other
industries.
It is important to emphasize that the productivity gains in Table 8 are achieved by copying present
performance in another country. Within some industries in some countries this may be difficult, maybe
because the specialization within an industry may differ between countries, and for some specializations
automation may be easier than for other specializations. On the other hand, the future productivity gains
probably exceed those in Table 8 as automation also increases in the best performing countries. If, for
example all industries became as automated as the transportation equipment industry in Germany, the
average productivity gains would be much higher – and in, for example, Denmark it would be 82 percent.

Table 9. Short run employment change if automation as in the most automated country
Best Japan Germany UK France Italy Spain Sweden Finland Denmark
Food, Tobacco FIN -6.4% -4.1% -6.4% -5.3% -5.5% -5.2% -3.3% 0.0% -3.4%
Textile, Leather DNK -4.5% -4.1% -4.5% -4.3% -4.5% -4.4% -4.5% -4.0% 0.0%
Wood, Furniture DNK -10.0% -0.5% -9.8% -9.5% -9.3% -8.7% -8.1% -9.2% 0.0%
Paper, Publishing FIN -1.0% -0.8% -1.3% -0.9% -1.1% -1.2% -1.2% 0.0% -0.9%
Chemical products ITA -6.1% -5.7% -13.7% -10.3% 0.0% -11.3% -9.1% -4.8% -9.6%
Glass, Ceramics, Stone GER -3.8% 0.0% -4.5% -3.1% -3.4% -3.6% -4.0% -3.2% -1.9%
Metal, Machinery DNK -2.6% -2.4% -5.5% -4.0% -2.9% -4.0% -0.5% -1.7% 0.0%
Electrictronic Equipment JPN 0.0% -7.8% -11.3% -10.5% -10.3% -10.4% -9.5% -6.5% -7.8%
Transport Equipment GER -7.4% 0.0% -35.6% -13.3% -3.8% -16.8% -30.7% -37.4% -38.0%
All Other JPN 0.0% -13.0% -19.3% -18.7% -18.3% -18.1% -18.3% -18.2% -18.5%
Total -3.8% -3.8% -10.4% -7.2% -4.9% -7.6% -7.3% -6.9% -7.1%
Note: The “Total” is the employment weighted average of the productivity change in all industries.

Table 10. Long run employment change if automation as in the most automated country
Best Japan Germany UK France Italy Spain Sweden Finland Denmark
Food, Tobacco FIN 4.6% 2.9% 4.6% 3.8% 3.9% 3.7% 2.4% 0.0% 2.5%
Textile, Leather DNK 3.2% 2.9% 3.2% 3.1% 3.2% 3.2% 3.2% 2.9% 0.0%
Wood, Furniture DNK 7.2% 0.4% 7.0% 6.8% 6.6% 6.2% 5.8% 6.6% 0.0%
Paper, Publishing FIN 0.7% 0.6% 0.9% 0.7% 0.8% 0.8% 0.8% 0.0% 0.6%
Chemical products ITA 4.3% 4.1% 9.8% 7.4% 0.0% 8.1% 6.5% 3.4% 6.9%
Glass, Ceramics, Stone GER 2.7% 0.0% 3.2% 2.2% 2.4% 2.6% 2.8% 2.3% 1.3%
Metal, Machinery DNK 1.8% 1.7% 3.9% 2.9% 2.1% 2.9% 0.3% 1.2% 0.0%
Electrictronic Equipment JPN 0.0% 5.6% 8.1% 7.5% 7.4% 7.4% 6.8% 4.6% 5.6%
Transport Equipment GER 5.3% 0.0% 25.4% 9.5% 2.7% 12.0% 21.9% 26.7% 27.1%
All Other JPN 0.0% 9.3% 13.8% 13.3% 13.1% 12.9% 13.1% 13.0% 13.2%
Total 2.7% 2.7% 7.4% 5.1% 3.5% 5.4% 5.2% 5.0% 5.1%
Note: The “Total” is the employment weighted average of the productivity change in all industries.

Tables 9 and 10 present short and long run employment effects of automation, respectively. In the short
run, there is a tendency for employment to fall due to the higher productivity. The average fall in most
countries is between 4 percent and 7 percent, in the UK, however, it is above 10 percent. These negative
employment developments are leveled out in the long run, where employment in most countries tends to
increase between 3 and 5 percent – in the UK above 7 percent.
These employment effects of automation should be interpreted carefully. It is assumed that, in the long
run, output responds to automation, and part of this output response is achieved because the marginal

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cost of production decreases relative to the marginal costs of the competitors. Hence, the employment
effects reflect the implications of one country automating relative to other countries. If all countries
simultaneously increase the degree of automation, the employment effects will be smaller and presumably
close to zero.

6. Conclusion
The use of a simple theoretical model gave rise to three hypotheses concerning the impact of automation:
First, that automation increases labor productivity; second, that automation decreases employment in the
short run; third, that automation increases employment in the long run.

The empirical study of this paper confirms all three hypotheses. The empirical study is carried out by
applying cross country, cross industry data on the use of industrial robots as a measure of automation. It is
found that automation has a significant positive impact on productivity in the short run as well as in the
long run. Moreover, automation tends to reduce employment in the short run. In the long run, however,
employment increases.

This study has also documented that the impact of automation on productivity and employment are
sizeable in economic terms. If countries increase the degree of automation to the same level as in the
corresponding industries in the most automated country, the countries in our sample may increase
aggregate productivity in the manufacturing sector between 8 percent in Germany and Japan and 22
percent in UK. Further, long run employment would tend to increase between 3 percent in Germany and
Japan and 7 percent in UK.

In some countries, the specialization within an industry implies that it may be more difficult to automate
than in the same industry in other countries. Therefore, the possible gains in productivity and employment
may be smaller than the numbers above indicate. On the other hand, it is probably possible to further
automate some of the most automated countries, and as far as this is the case, the possible gains in
productivity and employment from automation may be much larger than indicated by the the numbers
found in this study.

15
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