| Summary: | Many technological innovations replace workers with machines. But this capital–labor substitution need not reduce aggregate labor demand, because it simultaneously induces four countervail-ing responses: own-industry output effects; cross-industry input–output effects; between-industry shifts; and final demand effects. We quantify these channels using four decades of harmonized cross-country and industry data, whereby we measure automation as industry-level movements in total factor productivity that are common across countries. We find that automation displaces employment and reduces labor’s share of value added in the industries where it originates (a direct effect). In the case of employment, these own-industry losses are reversed by indirect gains in customer industries and induced increases in aggregate demand. By contrast, own-industry labor share losses are not recouped elsewhere. Our framework can account for a substantial fraction of the reallocation of employment across industries and the aggregate fall in the labor share over the last three decades. It does not, however, explain why the labor share fell more rapidly during the 2000s.
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