March 27, 2024

The Impact of Automation on Firm Performance and Expectations

Brent Meyer and Daniel Weitz

Since the COVID-19 pandemic, larger-than-normal cost growth has weighed on firms, prompting many to pass through higher costs to their customers and explore cost-reduction measures. In the most recent CFO Survey, we asked firms whether they adopted labor-replacing automation in the last 12 months. We also asked what motivated their decisions to automate and how it impacted their labor decisions. In this report, we investigate how the firms that adopted automation differ — in performance and expectations — from those that did not adopt automation.

We find that firms that automated tasks previously completed by employees generally experienced higher wage bill growth during 2023 but expect this growth to move lower in 2024. Additionally, on average, firms that automated expect their employment to grow more slowly over the next year as technology replaces labor. The link between automation and company revenue growth is less clear.

Which Firms Automate, and Why?

Around half of all respondents implemented technology over the past 12 months to automate tasks previously completed by employees. This includes around 75 percent of larger firms (over 500 employees), and 44 percent of smaller firms.

Of the firms that automated tasks, almost all (over 85 percent) selected cost savings as a motivating factor — a share that dwarfed all other possible selections. The next most important motivating factor, at roughly 60 percent of automating firms, was quality control.

Perhaps it is not surprising that a sizable share of CFOs cite "quality control" and "skills gap" as motivations to automate, since CFOs' top concerns over the past few years have consistently included labor quality and availability.

Automating Firms Faced Higher Wage Bill Growth in 2023, But Expect It to Slow in 2024

We examine firms' realized and expected wage bills for evidence that high labor costs indeed drove some companies to adopt labor-saving automation. We find that companies that experienced higher wage bill growth in 2023 are more likely to have adopted automation. That said, automating firms anticipate wage bill growth in 2024 that is closer to those firms not automating. This suggests that firms implementing automation expect to see some return on their investment in the form of reduced wage bill growth as soon as this year.

Automating Firms Expect Slower Employment Growth

Among firms implementing automation over the last 12 months, nearly 40 percent either left job openings unfilled, laid off employees, or slowed hiring because of automation, whereas 60 percent maintained the same rate of hiring new employees. These results suggest that, although most firms use automation as a complement to their workforce, a substantial minority view automation as a replacement for labor.

To quantify the impact of automation on firms' labor decisions, we compare the expected 2024 employment growth of firms that automated with those of firms that did not. Automating firms expect, on average, 1.5 percentage points slower employment growth in 2024 compared to firms not automating. Importantly, we find stark differences between automating firms according to how automation impacted their labor decisions. Those that restrained hiring growth or reduced their workforce — that is, automating firms that laid off employees, slowed hiring, or left vacancies open in 2023 — expect employment growth for 2024 that averages near zero. In contrast, automating firms that maintained the same rate of hiring new employees expect on average 5.5 percent employment growth over 2024.

Unclear Impact of Automation on Revenue Growth

While firms implementing automation anticipate a greater reduction in wage bill growth and expect slower employment growth than non-automating firms, there is less clarity on the linkage between automation and revenue growth. Overall, automating firms expect similar revenue growth to their non-automating peers. That said, we observe a bifurcation between automating firms that laid off employees, slowed hiring, or left vacancies open in 2023, which on average expect 3.4 percent revenue growth in 2024, and automating firms that maintained the same rate of hiring new employees, which on average expect revenue growth of 7.3 percent this year.

Automation of tasks represents a potential source of productivity growth that has the power to reshape the economic landscape, and it is therefore important to understand the linkage between automation and firm performance. One tentative implication of our findings in the most recent CFO Survey is that the impetus for automation among many firms may be reducing cost growth, specifically wage bill growth. A second implication is that automating firms may reap the benefit of slower wage bill growth, perhaps in part through slower expected employment growth. Finally, there is less clarity on the impact of automation on firm revenue growth. Given the impact of automation on economic growth through productivity and firm revenue, this linkage would benefit from additional data collection and analysis.

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