Working Paper: CEPR ID: DP12925
Authors: Nancy H. Chau; Ravi Kanbur
Abstract: How does employer power mediate the impact of labor saving technical change oninequality? This question has largely been neglected in the recent literature on the wage anddistributional consequences of automation, where the labor market is assumed to be competi-tive. In a simple task-based model, with search frictions which generate an equilibrium wagedistribution even with identical firms and workers, we explore the implications of labor savingtechnical change for equilibrium outcomes. We show that employer power is a crucial determi-nant of the nuanced comparative statics of technical change. Among a range of results, we showthe possibility of Kuznetsian inverse-U relationships between employer power and inequality,and labor saving technical change and inequality. We further show that when employer power issufficiently low, labor saving technical change can both increase total output and increase wageinequality. With free entry of firms, labor saving technical change leads to both a first orderdominating shift in the age distribution and an increase in the Gini coefficient of wage inequality.
Keywords: Employer power; Labor saving technical change; Wage inequality; Search model; Equilibrium wage distribution
JEL Codes: J31; J42; D31; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lowering employer power (J54) | increases expected wages (J39) |
| lowering employer power (J54) | Kuznets curve in wage inequality (D31) |
| labor saving technical change (O49) | raises the highest wages (J31) |
| labor saving technical change (O49) | increases unemployment rates (J65) |
| labor saving technical change (high employer power) (J29) | lowers total production efficiency (D24) |
| labor saving technical change (low employer power) (J29) | raises total production efficiency (E23) |
| labor saving technical change (high employer power) (J29) | lowers expected wages (J39) |
| labor saving technical change (low employer power) (J29) | raises expected wages (J39) |
| labor saving technical change (low employer power) (J29) | increases Gini coefficient of wages (D31) |
| labor saving technical change (O49) | increases expected wages and Gini coefficient (D31) |