Article,
The Rise of the Machines: Automation, Horizontal Innovation, and Income Inequality
Affiliations
- [1] University of Zurich [NORA names: Switzerland; Europe, Non-EU; OECD];
- [2] University of Copenhagen [NORA names: KU University of Copenhagen; University; Denmark; Europe, EU; Nordic; OECD]
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)
Keywords
US economy,
automation,
automation innovations,
decline,
distribution,
economy,
endogenous growth model,
growth model,
horizontal innovation,
horizontally,
income,
income distribution,
income inequality,
increase,
inequality,
innovation,
labor,
labor productivity,
labor share,
low-skilled wages,
machine,
model,
perspective,
premium,
production,
sharing,
skill premium,
skills,
trends,
wage
