The Remainder Effect: How Automation Complements Labor Quality

60 Pages Posted: 25 Feb 2022 Last revised: 7 Mar 2022

See all articles by James E. Bessen

James E. Bessen

Technology & Policy Research Initiative, BU School of Law

Erich Denk

Technology & Policy Research Initiative, BU School of Law

Chen Meng

Technology & Policy Research Initiative, Boston University; Kean University

Date Written: February 24, 2022

Abstract

This paper presents a novel way automation can raise wages. Extending the Acemoglu-Restrepo model of automation to consider labor quality, we obtain a Remainder Effect: while automation displaces labor on some tasks, it raises the returns to skill on remaining tasks across skill groups. This effect increases between-firm pay inequality while labor displacement affects within-firm inequality. Using job ad data, we find firm adoption of information technologies leads to both greater requests for diverse skills and higher pay across skill groups. This accounts for most of the sorting of skills to high paying firms that is central to rising inequality.

Keywords: automation, income inequality, skills, information technology, software

JEL Classification: J31, O33, J23

Suggested Citation

Bessen, James E. and Denk, Erich and Meng, Chen, The Remainder Effect: How Automation Complements Labor Quality (February 24, 2022). Boston Univ. School of Law Research Paper No. 22-3, Available at SSRN: https://ssrn.com/abstract=4042317 or http://dx.doi.org/10.2139/ssrn.4042317

James E. Bessen (Contact Author)

Technology & Policy Research Initiative, BU School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Erich Denk

Technology & Policy Research Initiative, BU School of Law ( email )

Boston, MA 02215
United States

Chen Meng

Technology & Policy Research Initiative, Boston University ( email )

Boston, MA 02215
United States

Kean University ( email )

1000 Morris Ave
Union, NJ 07083
United States

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