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

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  • Morten Olsen

    (IESE)

  • David Hemous

    (INSEAD)

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). For general processes of technical change, we demonstrate that although low-skill wages can drop during periods of increasing automation intensity, the asymptotic growth rate is weakly positive --- though lower than that of the economy. We then endogenize the evolution of technology and show that the transitional path follows three distinct phases. First, wages are low, such that few machines are used and low-skill wages keep pace with the growth rate of the economy. Then, as wages grow, the share of automated products increases and the economy substitutes towards the use of machines -- depressing the growth rate of low-skill wages (potentially to negative). Finally, as the economy reaches steady state, the share of automated products is constant and the relative growth rate of low-skill wages recovers somewhat, yet remains lower than that of the economy overall. Allowing workers to endogenously transition from low-skill to high-skill alleviates the growth in income inequality, but does not alter the structure of the model. We extend the model to include middle-skill workers and demonstrate that the model endogenously captures the defining characteristics of the U.S. income distribution over the past 50 years: initially a monotone dispersion of the income distribution, and thereafter a wage growth polarization in which middle-skill workers experience the lowest wage growth. Finally, in an extension we allow machines to be produced with a different technology than the consumption good. This allows for faster productivity growth for machines potentially leading to permanently negative growth of low-skill wages.

Suggested Citation

  • Morten Olsen & David Hemous, 2014. "The Rise of the Machines: Automation, Horizontal Innovation and Income Inequality," 2014 Meeting Papers 162, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:162
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    2. Martin Labaj & Daniel Dujava, 2019. "Economic growth and convergence during the transition to production using automation capital," Department of Economic Policy Working Paper Series 017, Department of Economic Policy, Faculty of National Economy, University of Economics in Bratislava.
    3. Zhou, Yixiao & Tyers, Rod, 2019. "Automation and inequality in China," China Economic Review, Elsevier, vol. 58(C).
    4. Ryosuke Shimizu & Shohei Momoda, 2020. "Does Automation Technology increase Wage?," KIER Working Papers 1039, Kyoto University, Institute of Economic Research.
    5. Sinha, Avik & Sengupta, Tuhin & Kalugina, Olga & Gulzar, Muhammad Awais, 2020. "Does distribution of energy innovation impact distribution of income: A quantile-based SDG modeling approach," Technological Forecasting and Social Change, Elsevier, vol. 160(C).
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    7. Jones, C.I., 2016. "The Facts of Economic Growth," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 3-69, Elsevier.
    8. Clemens Struck & Adnan Velic, 2017. "Automation, New Technology, and Non-Homothetic Preferences," Trinity Economics Papers tep1217, Trinity College Dublin, Department of Economics.
    9. Berg, Andrew & Buffie, Edward F. & Zanna, Luis-Felipe, 2018. "Should we fear the robot revolution? (The correct answer is yes)," Journal of Monetary Economics, Elsevier, vol. 97(C), pages 117-148.
    10. John G. Fernald, 2016. "Reassessing Longer-Run U.S. Growth: How Low?," Working Paper Series 2016-18, Federal Reserve Bank of San Francisco.
    11. Gravina, Antonio Francesco & Foster-McGregor, Neil, 2020. "Automation, globalisation and relative wages: An empirical analysis of winners and losers," MERIT Working Papers 2020-040, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    12. Li, Shiyuan & Li, Yumin, 2021. "The Impact of Mobile Phone Adoption on Income Inequality," MPRA Paper 110969, University Library of Munich, Germany.
    13. Lihua Gu, 2021. "The Impact of Intelligent Manufacturing on Export Sophistication: Evidence from Industrial Robots," International Journal of Business and Management, Canadian Center of Science and Education, vol. 14(12), pages 183-183, July.
    14. Ahmed S. Rahman, 2017. "Rise of the Machines Redux – Education, Technological Transition and Long-run Growth," Departmental Working Papers 61, United States Naval Academy Department of Economics.
    15. Kohei Okada, 2020. "Dynamic Analysis of Education, Automation, and Economic Growth," Discussion Papers in Economics and Business 20-09, Osaka University, Graduate School of Economics.
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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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