How do labor adjustment costs, specifically in the form of unionization, shape the evolution of wages and employment of workers exposed to labor replacement by automation? I argue that, by raising adjustment costs, unions generate intergenerational redistribution by shifting the impact from existing, older to incoming, younger cohorts, and further gen-
erate aggregate effects by accelerating overall labor reallocation from automating to nonautomating occupations. The reason is that labor adjustment costs incentivize firms to adjust through hiring rather than layoffs, and to reduce labor in anticipation of future adoption. Using variation across local labor markets in the U.S. since 1980, I document that unionization among exposed workers is associated with greater wage and employment decline among young relative to older workers, and with accelerated overall employment decline. I then develop an overlapping generations model of technological change and unionization that rationalizes the empirical findings through the impact of union-imposed labor adjustment costs on firms’ choice how to transform their workforce over time when gradually adopting automation. Within automating occupations, unions reduce the welfare cost of automation of older workers along the transition by up to 4% of permanent consumption while raising the welfare costs of cohorts entering during the transition by up to 2%. Incoming workers endogenously respond to automation by entering non-adopting occupations. The union effect spills over into nonadopting occupations as the accelerated labor reallocation depresses wages there.
Keywords: Technological change, unions, intergenerational transfers, welfare cost of automation