Working Paper: NBER ID: w25585
Authors: Seth G. Benzell; Erik Brynjolfsson
Abstract: Digital versions of labor and capital can be reproduced much more cheaply than their traditional forms. This increases the supply and reduces the marginal cost of both labor and capital. What then, if anything, is becoming scarcer? We posit a third factor, ‘genius’, that cannot be duplicated by digital technologies. Our approach resolves several macroeconomic puzzles. Over the last several decades, both real median wages and the real interest rate have been stagnant or falling in the United States and the World. Furthermore, shares of income paid to labor and capital (properly measured) have also decreased. And despite dramatic advances in digital technologies, the growth rate of measured output has not increased. No competitive neoclassical two-factor model can reconcile these trends. We show that when increasingly digitized capital and labor are sufficiently complementary to inelastically supplied genius, innovation augmenting either of the first two factors can decrease wages and interest rates in the short and long run. Growth is increasingly constrained by the scarce input, not labor or capital. We discuss microfoundations for genius, with a focus on the increasing importance of superstar labor. We also consider consequences for government policy and scale sustainability.
Keywords: Digital Economy; Wages; Interest Rates; Economic Growth; Scarcity
JEL Codes: D02; D8; O0; O11; O3; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in digital technologies (O39) | decrease in real median wages (J31) |
| increase in digital technologies (O39) | decrease in real interest rates (E43) |
| scarcity of genius (g) (D29) | decrease in real median wages (J31) |
| scarcity of genius (g) (D29) | decrease in real interest rates (E43) |
| scarcity of genius (g) (D29) | increase share of national income (E25) |
| increase in digitized capital and labor (E22) | decrease in wages (J31) |
| increase in digitized capital and labor (E22) | decrease in interest rates (E43) |