Technology, Inequality, and Aggregate Demand

Abstract

What is the macroeconomic implications of inequality caused by technological progress? Using a standard over-lapping-generations model with skill heterogeneity and the Roy-type occupational choice, this paper examines how routine-biased technological change impacts income distribution and aggregate demand. It finds that the relatively rapid labor productivity increase in the manufacturing sector compared to the service sector can explain job and wage polarization and about two-thirds of the decline in the real interest rate in the US from the 1980's to 2010's. It also documents the potential contribution of that biased technological change to the stagnation of aggregate output.

Keywords: Routine-Biased Technological Change, Income Inequality, Aggregate Demand, Secular Stagnation

JEL Classification: E21, E24, J24, J62, O33