Boston University - Department of Economics - The Institute for Economic Development Working Papers Series
Over the past forty years, economic growth in the United States has been unevenly distributed: income percentiles corresponding to the lower half of the distribution have stagnated while those at the top have sharply increased. At the same time, the aggregate labor share has fallen and wealth inequality has risen. We study technical change as a candidate cause of these trends. To this end, we develop a tractable theory that links technology to the personal income and wealth distributions, and not just the wage distribution as is commonly done in the existing literature. We use this theory to study the distributional effects of automation, defined as technical change that substitutes labor with capital. We isolate a new theoretical mechanism: automation may increase inequality via increasing returns to wealth. The flip side of this mechanism is that, relative to theories in which returns are unaffected, automation is more likely to lead to stagnant wages and therefore stagnant incomes at the bottom of the income distribution. We confront our model with the data and argue that automation can account for part of the observed trends in the distribution of wages, incomes and wealth as well as macroeconomic aggregates.