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

Hémous, David and Morten Olsen
Authors registered in the RePEc Author Service: David Hemous

No 10244, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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). Such an economy endogenously follows three phases. First, low-skill wages are low, which induces little automation, such that income inequality and labor's share of GDP are constant. Second, as low-skill wages increase, investment in automation is stimulated, which depresses the future growth rate of low-skill wages (potentially to negative), and reduces the total labor share. Finally, the share of automated products stabilizes and the economy moves toward an asymptotic steady state, where low-skill wages grow but at a lower rate than high-skill wages. This model therefore delivers persistently increasing wage inequality and stagnating real wages for low skill workers for an extended period of time, features of modern labor markets which have been difficult to reconcile with the theoretical literature on economic growth. We further include middle-skill workers, which allows the model to generate a phase of wage polarization after one where labor income inequality increases uniformly. Finally, we show that an endogenous labor supply response in 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.

Keywords: Automation; Capital-skill complementarity; Directed technical change; Factor share; Horizontal innovation; Income inequality; Wage polarization (search for similar items in EconPapers)
JEL-codes: E23 E25 O31 O33 O41 (search for similar items in EconPapers)
Date: 2014-11
New Economics Papers: this item is included in nep-gro, nep-ino, nep-lab, nep-lma and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Downloads: (external link)
https://cepr.org/publications/DP10244 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: The Rise of the Machines: Automation, Horizontal Innovation, and Income Inequality (2022)
Working Paper: The Rise of the Machines: Automation, Horizontal Innovation and Income Inequality (2015)
Working Paper: The Rise of the Machines: Automation, Horizontal Innovation and Income Inequality (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:10244

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10244

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().