Labor Shortages Increase Investment in Automation and Result in Productivity Gains for Some Firms

Source: Mick Dueholm, et al., "Does Worker Scarcity Spur Investment, Automation and Productivity? Evidence from Earnings Calls,"Federal Reserve Bank of St. Louis, June 20, 2024.

Commentary: The COVID-19 pandemic caused historically high labor shortages resulting in, at its peak, two job vacancies per one unemployed worker. To fill vacant jobs, employers were pushed to increase wages, thus driving up the cost of labor. Through econometric analysis, authors Mick Dueholm, et al. investigate the effect that high job vacancies and labor costs have on investment in automation, and further, what effect this investment has on productivity. Using data from earnings calls conducted from 2002 to 2024, the authors find that there is a high correlation between firms that mention labor shortages and firms that mention automation, as well as a high correlation between labor shortages and increases in investment spending. Finally, they find that industries experiencing labor shortages that work in heavily manual tasks see long run increases in labor productivity. The authors conclude that while a labor shortage may drive up the cost of labor in the short run, in the long run it results in increased labor productivity and reduced prices.