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


Hémous, David; Olsen, Morten (2015). The Rise of the Machines: Automation, Horizontal Innovation and Income Inequality. CEPR Discussion Paper DP10244, University of Zurich.

Abstract

We construct an endogenous growth model with automation (the introduction of machines which replace low-skill labor) and horizontal innovation. The economy follows three phases. First, low-skill wages are low, which induces little automation, and income inequality and labor’s share of GDP are constant. Second, as low-skill wages increase, automation increases which reduces the labor share, increases the skill premium and may decrease future low-skill wages. Finally, the economy moves toward a steady state, where low-skill wages grow but at a lower rate than high-skill wages. The model is quantitatively consistent with the US labor market experience since the 1960s.

We construct an endogenous growth model with automation (the introduction of machines which replace low-skill labor) and horizontal innovation. The economy follows three phases. First, low-skill wages are low, which induces little automation, and income inequality and labor’s share of GDP are constant. Second, as low-skill wages increase, automation increases which reduces the labor share, increases the skill premium and may decrease future low-skill wages. Finally, the economy moves toward a steady state, where low-skill wages grow but at a lower rate than high-skill wages. The model is quantitatively consistent with the US labor market experience since the 1960s.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:O41, O31, O33, E23, E25
Language:English
Date:June 2015
Deposited On:19 Feb 2016 15:26
Last Modified:12 Jul 2016 08:03
Series Name:CEPR Discussion Paper
Permanent URL: https://doi.org/10.5167/uzh-122916

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