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

40 Pages Posted: 29 Sep 2013 Last revised: 3 Apr 2018

See all articles by David Hémous

David Hémous

University of Zürich; Centre for Economic Policy Research (CEPR)

Morten Olsen

University of Copenhagen

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2018


We construct an endogenous growth model with automation and horizontal innovation in an economy with low- and high-skill workers. Automation enables the replacement of low-skill workers with machines, increasing the skill premium and possibly decreasing low-skill wages. Horizontal innovation increases both wages. Higher low-skill wages increase incentives to automate so that automation plays a bigger role as an economy develops. Our model is consistent with a permanently increasing skill premium, a temporary drop in low-skill wages and a drop in the labor share. We calibrate it and show that taxing automation innovation reduces low-skill wages in the long run.

Keywords: Capital-skill complementarity, income inequality, automation, horizontal innovation, wage polarization

JEL Classification: E23, E25, O31, O33, O41

Suggested Citation

Hemous, David and Olsen, Morten, The Rise of the Machines: Automation, Horizontal Innovation and Income Inequality (March 1, 2018). Available at SSRN: or

David Hemous

University of Zürich ( email )


Centre for Economic Policy Research (CEPR)

United Kingdom

Morten Olsen (Contact Author)

University of Copenhagen ( email )


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