Paper

Abstract:
 

Persistently increasing wage inequality, polarization of the wage distribution, and stagnating real wages for low skill workers are some of the most salient features of modern labor markets, but are difficult to reconcile with the theoretical literature on economic growth. To better understand the mechanisms driving these phenomena, we construct an endogenous growth model of directed technical change with automation (the introduction of machines which replace low-skill labor and complement high-skill labor) and horizontal innovation (the introduction of new products, which increases demand for both types of labor). The economy endogenously follows three phases: First, both low-skill wages and automation are low, while income inequality and the labor share are constant. Second, increases in low-skill wages stimulate investment in automation, which depresses the growth rate of future low-skill wages (potentially to negative), and reduces the total labor share. Finally, the share of automated products stabilizes and low-skill wages grow at a positive but lower rate than high-skill wages. Adding middle skill workers allows the model to generate a phase of wage polarization after one of uniform increase in income inequality. We show that this framework can quantitatively account for the evolution of the skill premium, the skill ratio and the labor share in the US since the 1960s

The model shows that there is a long-run tendency for technical progress to displace
substitutable labor, here low-skill labor by assumption (this is a point made by Ray, 2014,
in a critique of Piketty, 2014), but this only occurs if the wages of the workers which
can be substituted for are large relative to the price of machines. This in turn can only
happen under three scenarios: either automation must itself increase the wages of these
workers (the scale effect dominates the substitution effect), or there is another source of
technological progress (here, horizontal innovation), or technological progress allows a
reduction in the price of machines relative to the consumption good. Importantly, when
machines are produced with a technology similar to the consumption good, automation
can only reduce wages temporarily, as in Figure 4: a prolonged drop in wages would end
the incentives to automate in the first place.

this is key, not only now but more importantly in the long term. so much can be said about this.