Technological Change and Earnings Inequality in the U.S.: Implications for Optimal Taxation

64 Pages Posted: 13 Jun 2022 Last revised: 5 Oct 2022

See all articles by Pedro Brinca

Pedro Brinca

Nova School of Business and Economics

João B. Duarte

Nova School of Business and Economics

Hans Aasnes Holter

University of Delaware - Economics; University of Oslo - Department of Economics; Nova School of Business and Economics

João Henrique Barata Gouveia de Oliveira

Nova School of Business and Economics

Date Written: June 5, 2022

Abstract

Since 1980 there has been a steady increase in earnings inequality alongside rapid technological growth in the U.S. economy. To what extent does technological change explain the observed increase in earnings dispersion? How does it affect the optimal progressivity of the tax system? To answer these questions we develop an incomplete markets model with occupational choice. We estimate an aggregate production function with capital-occupation complementarity and four occupations that differ with respect to cognitive complexity and routine task intensity. We calibrate our model to resemble the U.S. economy in 1980 and find that technological transformation can fully account for the increase in earnings dispersion between 1980 and 2015. The main driver is the rising relative wage of non-routine cognitive occupations, which benefit the most from complementarity with capital. Although technological growth is associated with higher earnings inequality it leads to a significant drop in optimal tax progressivity. Lower progressivity leads to an inflow of workers into higher-paid occupations. This increases output but also raises the wages of the occupations at the bottom of the wage distribution, dampening the redistributive gains from progressive taxation.

Keywords: Earnings Inequality, Taxation, Technological Change, Automation

JEL Classification: E21, E23, E62, H21, H23, J24, J31, O33, O40

Suggested Citation

Brinca, Pedro and Duarte, João B. and Holter, Hans Aasnes and de Oliveira, João Henrique Barata Gouveia, Technological Change and Earnings Inequality in the U.S.: Implications for Optimal Taxation (June 5, 2022). Available at SSRN: https://ssrn.com/abstract=4128417 or http://dx.doi.org/10.2139/ssrn.4128417

Pedro Brinca

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

HOME PAGE: http://htttp://www.pedrobrinca.pt

João B. Duarte

Nova School of Business and Economics ( email )

Campus de Carcavelos
Cascais
Portugal

Hans Aasnes Holter (Contact Author)

University of Delaware - Economics ( email )

Newark, DE 19716
United States

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+47-22855108 (Phone)

HOME PAGE: http://sites.google.com/site/hansaholter/

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

João Henrique Barata Gouveia De Oliveira

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
368
Abstract Views
1,071
Rank
154,681
PlumX Metrics