Automation, Skill Premium, and Labor Share

Lu Chia-Hui ()
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Lu Chia-Hui: Department of Economics, 63284 National Taipei University , 151, University Rd., San-Shia, 23741 New Taipei, Taiwan

The B.E. Journal of Macroeconomics, 2025, vol. 25, issue 2, 763-798

Abstract: By introducing automation development into a Ramsey–Cass–Koopmans model, this paper shows that the phenomenon of the skill premium will appear when firms use automation to replace labor. As automation becomes more important to production, capital share, including capital rental and profit shares, will rise, while labor share will fall. Meanwhile, the income inequality of unskilled labor relative to other income earners will increase. When households have endogenous occupational choices, the results still hold. Although the government’s policy of subsidizing people’s learning costs helps to reduce the wage gap between skilled and unskilled labor, it does not stop the decline in the labor share regardless of whether the government subsidy is financed by lump-sum taxes or the taxes on earnings generated from assets.

Keywords: automation; skill premium; labor share; income inequality (search for similar items in EconPapers)
JEL-codes: E24 E64 H24 J24 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1515/bejm-2025-0030

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