Third option, the workers no longer control the means of production, and we see levels of inequality that make the railroad barons look like they were middle class.
The bottom line is, at some point in time, automation is going to reduce the amount of human work which needs to be done, and render some folks unemployable --- how does society cope with that? Universal Basic Income is the only reasonable suggestion I've yet seen, but doesn't address the age-old problem of socialism --- it only works until one runs out of other people's money.
Back when computers were first announced, taxing CPUs so as to cover benefits for newly unemployed folks was suggested --- can we put that back on the table?
For a fictional take on this see:
Jevons paradox [0] proposes that as automation reduces the cost of labor then people will find new uses for automation, and this seems to be the historical trajectory. Hundreds of years since the industrial revolution and we still haven't run out of work to do (this could be better or worse given your philosophical premises).
> and render some folks unemployable
If automation truly causes more actually productive work to be done, then as a first-order effect there should be a surplus available to support these people without making anyone else (much) worse off. However as you observe the higher-order consequences of this are very much an open issue.
the current climate crisis suggests that we are running out:
https://dothemath.ucsd.edu/2012/04/economist-meets-physicist...
But we are there. This is a reality we live in for a lot of people. That's why the existential crisis in the OP.
It'll be interesting to see what happens when AI truly surpasses human level intelligence, as in, being able to completely replace human jobs, but we're not there yet. It's likely that when we reach that stage, the world will change dramatically and we will either live lives of abundance and leisure or face extinction :)