Robots and Labour Regulation: A Cross-Country and Cross-Industry Analysis

While the surge in the stock of industrial robots operating worldwide has captured the attention of an increasing number of scholars, relatively few works have focussed on the legal factors that may contribute to explain why countries and industries follow trajectories that are so remarkably different in terms of robot adoption. This gap in the literature poses substantial limitations to the policy debate about the most appropriate strategies to address the challenges and seize the opportunities associated with the ongoing automation revolution. In a recent paper, supported by the LIW project at the University of Trento, we contribute to fill this gap in the literature by discussing the relationship between labour institutions (and the discipline of workers’ dismissal in particular) and robotization. More precisely, focusing on nineteen high- and middle-income countries (eighteen European countries and the US) over the 2006-2016 period, we study whether and to what extent the interplay between labour protections and the idiosyncratic characteristics of different industries can explain the substantial cross-country and cross-industry variability observed in the patterns of robot adoption.

Using the literature on incomplete contracts and the hold-up problem à la Williamson, we argue that labour market regulations can influence robot adoption via two main channels. On the one hand, if robots represent a form of capital investment, this literature seems to suggest a negative relationship between high levels of statutory employment protection and robot adoption. Labour-friendly regulations contribute to increase adjustment costs and to make firms more vulnerable against opportunism and negative shocks, therefore likely reducing their overall propensity to invest and to adopt innovative technologies. On the other hand, if robots can substitute workers, one may expect that high levels of statutory employment protection will provide an incentive for firms to invest in robot technologies, since it would contribute to mitigate the risks associated to workers’ hold-up. Robots, in fact, do not (yet?) behave opportunistically. An interesting reading of these theoretical predictions is that they seem to highlight the dual nature of robots, which can complement labour, thus working as physical capital, while also being a direct substitute for workers.

Our empirical results, while not conclusive, are consistent with this idea of the dual nature of robots. We employ the quantitative information on labour laws of the Labor Regulation Index database, made available by the Cambridge Centre for Business Research, providing, for more than one hundred countries, forty different time-varying scores associated with different dimensions of labour regulation, nine of which relate to workers’ dismissal. Data on industrial robots have been purchased from the International Federation of Robotics, which provides information on the stock and shipment of industrial robots for more than 70 countries. We find that high levels of statutory employment protection have been negatively associated with robot adoption. This finding suggests that labour-friendly national legislations, by increasing adjustment costs (such as firing costs), and thus making investment riskier, provide less favourable environments for firms to invest in industrial robots. We also find, however, that the correlation is positively mediated by the sectoral levels of capital intensity, a hint that firms do resort to industrial robots as potential substitutes for workers to reduce employees’ bargaining power and their hold-up opportunities, which tend to be larger in sectors characterized by high levels of operating leverage. Namely, the presence of tight labour regulations can represent an incentive for firms to pursue robotization to reduce the risk of workers’ hold-up that, all other things being equal, tends to be higher in capital-intensive sectors. This result is suggestive that the willingness of firms to replace labour to limit hold-up risks represents one of the drivers for the adoption of industrial robots.

Silvio Traverso is an assistant professor in the Department of Economics of the University of Genoa, Italy.

Massimiliano Vatiero is an assistant professor in the Department of Economics and Management of the University of Trento, Italy; and ‘Brenno Galli’ Chair in the Law Institute (IDUSI) of the Università della Svizzera italiana, Switzerland.

Enrico Zaninotto is a full professor in the Department of Economics and Management of the Università of Trento, Italy.