The Remainder Effect: How Automation Raises Returns to Detailed Skills

Boston Univ. School of Law Research Paper No. 22-3

62 Pages Posted: 25 Feb 2022 Last revised: 18 Aug 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

Using help-wanted ad data, this paper argues that automation increases demand for detailed skills that are typically unobserved, but which are major determinants of pay. Following automation events, we find that employers request more detailed skills and they substantially increase pay offers (8.7%). Importantly, these increases are not limited to select occupational groups—they apply to both routine and non-routine jobs, to jobs requiring college and those that do not. To explain this phenomenon, we extend the Acemoglu-Restrepo task-based model of automation to consider labor quality, which depends on workers having task-specific skills. We obtain a Remainder Effect: when automation displaces labor on some tasks, it raises the returns to specific skills on the remaining tasks performed by diverse occupational groups. Because not all firms automate, this effect can raise income dispersion within occupations and between firms, including the sorting of skilled workers to high-paying firms. In contrast, labor displacement alone tends to increase between-occupation pay differences.

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 Raises Returns to Detailed Skills (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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