The Rise of the Machines: Automation, Horizontal Innovation, and Income Inequality

Abstract

We build an endogenous growth model with automation (the replacement of low-skill workers with machines) and horizontal innovation (the creation of new products). Over time, the share of automation innovations endogenously increases through an increase in low-skill wages, leading to an increase in the skill premium and a decline in the labor share. We calibrate the model to the US economy and show that it quantitatively replicates the paths of the skill premium, the labor share, and labor productivity. Our model offers a new perspective on recent trends in the income distribution by showing that they can be explained endogenously. (JEL D31, E25, J24, J31, O33, O41)

Why Didn't the College Premium Rise Everywhere? Employment Protection and On-the-Job Investment in Skills

“…Alternative explanations for the deterioration of labor market outcomes for less-educated workers include automation and robotization (Hémous andOlsen 2018, Acemoglu andRestrepo 2020), job polarization , and exposure to trade (Autor, Dorn, and Hanson 2013). More closely related to our analysis, Acemoglu (1999) develops a model in which changes in macroeconomic conditions generate a shift in the type of jobs offered by firms.…”

Difficulties in finding middle-skilled jobs under increased automation

“…Acemoglu (2010) generalized this type of technical change as "laborsaving technologies." Several studies have explored the different mechanisms that lead new task creation to increase the demand for labor (Acemoglu and Restrepo, 2018;Hemous & Olsen, 2022;Nakamura & Zeira, 2018). Alvarez et al (2019) studied the possible effects of labor-saving innovations on birth rates and, in this way, on future labor supply.…”

Should the government subsidize innovation or automation?

“…13 Recall that automation is only directed to currently unautomated industries, which have a mass of 1 t . 14 If < 0, then it acts as a tax on automation. 15 Recall that automation does not improve quality but only allows for capital-labor substitution.…”