Confronting Inequality by Jonathan D. Ostry

Author:Jonathan D. Ostry
Language: eng
Format: epub
Tags: Business & Economics/Money & Monetary Policy, POL024000, BUS045000, Political Science/Public Policy/Economic Policy
Publisher: Columbia University Press
Published: 2019-01-08T00:00:00+00:00

FIGURE 8.1: Effect of Increased Robot Efficiency on Wages, Income, and Income Shares

An increase in the efficiency of robots eventually raises wages—after twenty years—but lowers labor’s share of income.

Note: For wages (dashed line) and GDP (solid line), the left panel shows deviation from initial steady state in percentage points. The x-axis shows time in years. The elasticity of substitution between “robot” capital and labor is assumed to be 2.5. See Berg, Buffie, and Zanna (2018) for details and various alternative scenarios. The specific assumption is that the elasticity of substitution between workers and “robot” capital is 2.5, meaning that a 1 percent increase in the wage would increase the ratio of robot capital to labor by 2.5 percent, holding constant other prices and the quantity of traditional capital. Details and many alternative scenarios are presented in Berg, Buffie, and Zanna (2018).

But there are two problems. First, “eventually” can be a long time coming. Exactly how long depends on how easy it is to substitute robots for human labor, and how quickly savings and investment respond to rates of return. According to our model’s baseline scenario shown in figure 8.1, it takes twenty years for the productivity effect to outweigh the substitution effect and drive up wages. Second, capital will still likely greatly increase its role in the economy. It will not completely take over as it does in the singularity case, but it will take a higher share of income, even in the long run when wages are above the pre-robot-era level. Thus, inequality will be worse, possibly dramatically so.

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