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© 2021 International Monetary Fund

WP/21/187

IMF Working Paper

Fiscal Affairs Department and Institute for Capacity Development

For the Benefit of All: Fiscal Policies and Equity-Efficiency Trade-offs in the Age of Automation

Prepared by Andrew Berg, Lahcen Bounader, Nikolay Gueorguiev, Hiroaki Miyamoto, Kenji Moriyama, Ryota Nakatani, and Luis-Felipe Zanna¹

Approved by Vitor Gaspar

July 2021

Abstract

Many studies predict massive job losses and real wage decline as a result of the ongoing widespread automation of production, a trend that may be further aggravated by the COVID-19 crisis. Yet automation is also expected to raise productivity and output. How can we share the gains from automation more widely, for the benefit of all? And what are the attendant equity-efficiency trade-offs? We analyze this issue by considering the effects of fiscal policies that seek to redistribute the gains from automation and address income inequality. We use a dynamic general equilibrium model with monopolistic competition, including a novel specification linking corporate power to automation. While fiscal policy cannot eliminate the classic equity-efficiency trade-offs, it can help improve them, reducing inequality at small or no loss of output. This is particularly so when policy takes advantage of novel, less distortive transmission channels of fiscal policy created by the empirically observed link between corporate market power and automation.

JEL Classification Numbers: E25; H30; O30; O40.

Keywords: Automation; Fiscal Policy; Redistribution; Technological Change; Mark-up.

Authors’ E-Mail Addresses: ABerg@imf.org; LBounader@imf.org; NGueorguiev@imf.org; HMiyamoto@tmu.ac.jp; KMoriyama@imf.org; RNakatani@imf.org; FZanna@imf.org.

Contents

• ABSTRACT

• I. INTRODUCTION

• II. LITERATURE

• A. Empirical Studies on the Impact of Automation on Employment and Income Distribution

• B. Impact of the COVID-19 Crisis on Employment, Income Distribution, and Market Power

• C. Policy Impact to Address the Trade-off of Automation by Quantitative Models

• III. THE MODEL AND POLICY PACKAGES

• A. The Model

• B. Policy Packages

• IV. TRANSITION DYNAMICS OF A MODEL ECONOMY WITH POLICY PACKAGES

• A. Baseline

• B. Tax-and-Redistribute Group of Policy Packages

• C. Tax-and-Invest Group

• D. Non-Fiscal Measure Group

• V. COMPARING WELFARE ACROSS POLICY PACKAGES DURING TRANSITION

• A. Income and Inequality

• B. Disposable Income of the Two Types of Workers

• C. Equally Distributed Equivalent Income (EDEI)

• D. Social Welfare Based on Utility Function

• VI. ENDOGENOUS MARK-UP—AN ILLUSTRATIVE EXAMPLE

• A. Relationship Between Automation and Price Mark-up

• B. Impact of Endogenous Mark-up on Production Efficiency: Two Additional Transmission Channels

• C. Welfare Implications of the Endogenous Mark-up

• VII. SENSITIVITY ANALYSIS

• VIII. SUMMARY OF THE RESULTS AND POLICY IMPLICATIONS

• REFERENCES

• FIGURES

• 1. Growth Accounting: Baseline

• 2. Disposable Income Decomposition: Baseline

• 3. Raising Tax on Capital Income

• 4. Wealth Tax

• 5. Consumption Tax

• 6. Robot Tax

• 7. Raising Tax on Mark-up

• 8. Growth Accounting: Lowering Tax on Unskilled Wage

• 9. Raising Tax on Capital Income for Education Spending

• 10. Growth Accounting: Rigid Unskilled Wage

• 11. Exogenous Mark-up: Income and Inequality

• 12. Exogenous Mark-up: Disposable Incomes

• 13. Equally Distributed Equivalent Income

• 14. Social Welfare Function

• 15. Robot Tax

• 16. Raising Tax on Mark-up

• 17. Endogenous Mark-up: Income and Inequality

• 18. Endogenous Mark-up: Disposable Incomes

• 19. Equally Distributed Equivalent

• 20. Social Welfare Function

• 21. Evolution of Economic Variables in the Sensitivity Analysis

• 22. Income and Inequality

• 23. Disposable Incomes

• 24. Equally Distributed Equivalent Income

• 25. Social Welfare Function

• 26. Desirable Policy Packages

• Annex

• I. Full Description of the Policy Packages