Omer Faruk Koru
Automation and Top Wealth Inequality
Over the last 50 years, the share of wealth held by the richest 1% of individuals in the US has increased by 30%. This paper analyzes the effects of improvements in automation technology on the rise of the top wealth share. I build an incomplete market model with entrepreneurs and a collateral constraint. Automation impacts wealth concentration through two channels. First, it decreases the severity of diseconomies of scale in the entrepreneurial sector, and, hence, it increases income concentration. Since wealth distribution follows the income distribution, it affects wealth concentration. Second, it raises capital demand, which tightens the collateral constraint and, in turn, increases the dispersion of the return to capital. I calibrate the model to the 1968 US economy to quantitatively analyze the impact of an improvement in automation. I analyze the impact of an unexpected increase in automation technology to the 2016 level. In the model, the capital share of income equals the automation level; hence, I measure the increase in automation by the change in the capital share. In the new steady-state, the top wealth share increases by 8%. In other words, the model can explain one-fourth of the rise in the wealth share of the top 1%. In consumption equivalence terms, workers’ welfare increased by 4% and entrepreneurs’ welfare increased by 8%.
Macroeconomics, Labor Economics, Inequality and Entrepreneurship.
Harold L. Cole