Automation, Skill Premium, and Labor Share

Abstract By introducing automation development into a Ramsey–Cass–Koopmans model, this paper shows that the phenomenon of the skill premium will appear when firms use automation to replace labor. As automation becomes more important to production, capital share, including capital rental and profit shares, will rise, while labor share will fall. Meanwhile, the income inequality of unskilled labor relative to other income earners will increase. When households have endogenous occupational choices, the results still hold. Although the government’s policy of subsidizing people’s learning costs helps to reduce the wage gap between skilled and unskilled labor, it does not stop the decline in the labor share regardless of whether the government subsidy is financed by lump-sum taxes or the taxes on earnings generated from assets.