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

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)

Changed Industrial Relationship by Offshoring Threat and Labor Share: An Empirical Game-Theoretic Analysis

Research indicates that the labor share of the aggregate income has decreased steadily since the mid-1970s, i.e. when the globalization process began. This paper discusses the ways in which qualitative changes in globalization, coupled with increased offshoring, have changed industrial relationships. In our analysis, we consider a simple Nash bargaining model between employers and employees. Our model proposes the hypotheses that employees gain the power to increase their wages when employers do not have the option of offshoring. However, employees typically lose this power when employers possess an offshoring threat, culminating in wage deduction. Leveraging a panel set of data obtained from 18 OECD countries during the period 1975–2017, we have empirically confirmed these hypotheses by comparing the first phase of globalization—not characterized by an offshoring threat—with the second phase, which entails an offshoring threat. Our findings reveal that workers’ bargaining power, positively affects labor share in the first phase; however, it loses its effect in the second phase when offshoring exerts its negative effects on labor share. We conclude that a qualitative change in globalization with increased offshoring radically changed industrial relationship through the threat effect.

Artificial Intelligence and Economic Growth: A Theoretical Framework

The growing adoption of Artificial Intelligence (AI) has sparked ubiquitous concerns worldwide. Artificial intelligence can affect economic growth and employment. The influence is assumed to be substantial because the adoption of AI technology may lead to increased productivity, lower wages, prices, and labor substitution. Artificial intelligence can affect global economic growth with its widespread adoption and diffusion. We mathematically examined the effects of AI on economic growth, reiterating how AI is unique as a production factor. The models show that AI capital lowers capital prices, increases wages, and augments productivity. Besides, AI capital positively affects the labor share and vice versa, provided that AI and labor are complementary. We improved a task-based model to show AI raises both labor share and wages by generating new tasks. We also present the potential policy implications of AI adoption. We conclude AI can contribute to economic growth. Labor-abundant countries should adopt labor-augmenting technology, while countries with an aging population can adopt capital-augmenting technology. However, caution should be exercised in ensuring that the models are leveraged optimally.

Do Trade Agreements Contribute to the Decline in Labor Share? Evidence from Latin American Countries

In this paper, we explore the role of trade in the evolution of labor share in Latin American countries. We use trade agreements with large economies (the United States, the European Union, and China) to capture the effect of sharp changes in trade. In the last two decades, labor share has displayed a negative trend among those countries that signed trade agreements, while in other countries labor share increased, widening the gap by 7 percentage points. We apply synthetic control methods to estimate the average causal impact of trade agreements on labor share. While effects are heterogeneous in our eight case studies, the average impact is negative between 2 to 4 percentage points of GDP four years after the entry into force of the trade agreements. This result is robust to the specification used and to the set of countries in the donor pool. We also find that, after trade agreements, exports of manufactured goods and the share of industry in GDP increase on average, most notably in the case studies where negative effects on labor share are significant. A decomposition shows that all the reduction in labor share is explained by a negative impact on real wages.

Is it fair that advanced workers get paid disproportionally more: economic analysis

PurposeOn the one hand, everyone agrees that economics should be fair, that workers should get equal pay for equal work. Any instance of unfairness causes a strong disagreement. On the other hand, in many companies, advanced workers – who produce more than others – get paid disproportionally more for their work, and this does not seem to cause any negative feelings. In this paper, the authors analyze this situation from the economic viewpoint.Design/methodology/approachTo analyze the problem, the authors use general mathematical models of how utility – and hence, decisions – depends on the pay-per-unit.FindingsThe authors show that from the economic viewpoint, additional payments for advanced workers indeed make economic sense, benefit everyone, and thus – in contrast to the naive literal interpretation of fairness – are not unfair. As a consequence of this analysis, the authors also explain why the labor share of the companies' income is, on average, close to 50% – an empirical fact that, to the best of the authors’ knowledge, was never previously explained.Originality/valueTo the best of the authors’ knowledge, this is the first paper that explains the empirical fact – that the labor share of the income is close to 50%.

What Can We Learn from Idiosyncratic Wage Changes?

I document six facts about wage changes. First, most pay revisions occur at yearly frequency, but a small proportion occur at idiosyncratic times. Second, idiosyncratic pay changes are larger and more dispersed than year-end pay changes and resemble more pay changes occurring at job-to-job transitions. Third, idiosyncratic pay changes are more common for workers with less experience and, fourth, in firms higher on the job-ladder. Fifth, industries in which the incidence of idiosyncratic raises have risen have experienced greater declines in labor share. Sixth, industries in which more firms report willingness to negotiate wages have greater concentrations of idiosyncratic revisions. An on-the-job search model with heterogeneous wage contracts can rationalize these facts.