Automation and inequality with taxes and transfers
| Published date | 01 February 2023 |
| Author | Rod Tyers,Yixiao Zhou |
| Date | 01 February 2023 |
| DOI | http://doi.org/10.1111/sjpe.12313 |
68
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Scott J Polit Econ. 2 023;70:68–100.
wileyonlinelibrary.com/journal/sjpe
Received: 3 Janu ary 2021
|
Accepted: 11 April 20 22
DOI: 10.1111/sjpe.12313
ORIGINAL ARTICLE
Automation and inequality with taxes and
transfers
Ro d Tye rs1,2 | Yixiao Zhou3
This is an open ac cess article und er the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which
permits us e and distributio n in any medium, provid ed the original wor k is properly cited , the use is non-comme rcial and no
modificat ions or adaptatio ns are made.
© 2022 The Auth ors. Scottish Journal of Political Economy publishe d by John Wiley & Sons Ltd o n behalf of Scottish Ec onomic
Soci ety.
1Business Sch ool, Universit y of Western
Australia , Perth, Western Au stralia,
Australia
2Research Sch ool of Economics, Ce ntre for
Applied Mac roeconomic Anal ysis (CAMA),
Australia n National Universi ty, Canberra,
Australia n Capital Territor y, Australia
3Arndt- Corden Department of Eco nomics,
Crawford Sc hool of Public Polic y, Australian
National Uni versity, Canberr a, Australian
Capital Territ ory, Australia
Correspondence
Rod Tyers, UWA Busines s School, Crawley,
WA 6009, Australi a.
Email: rod.tyers@uwa.edu.au
Funding information
Australia n Research Council , Grant/Award
Number: GA6 8997
Abstract
Declin es in low- skill lab our shares ar e reviewed, an d a styl-
ised model is constructed to ex amine their determinants
and future imp lications. A retrospect ive analysis of US
shocks sugges ts that technological change ha s contrib-
uted mo re to raising income ine quality and the wealth to
GDP ratio t han other changes. An anticipated future t wist
away from low- skill labour toward th e capital , combined
with population growth, risks high unemployment rates.
Productivit y growt h at twice the pace sin ce 1990 limits
this, though inequality persists. Analysis shows that a gen-
eralisation of the US ‘earned income tax credit’ system with
consumption tax outpe rforms alternatives of the ‘universal
basic income’.
KEYWORDS
automation, gen eral equilibrium anal ysis, income distribut ion,
taxes, tran sfers
JEL CLASSIFICATION
C68; D33; D58; O33
1 | INTRODUCTION
Prominent trends in global economic performance that have emerged in the past three decades include slowing
growth in total factor productivity in advanced economies, most notably during the first decade of the millennium
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Tyers and Zhou
(Eichengreen et al., 2017; Lo & Rogoff, 2015; Taylor & Tyers, 2017), declines in rates of return on investment and
long- maturity bond yields (Rachel & Summers, 2019; Summers, 2014, 2016) and the tendency for the new income
and wealth that has been generated to have been captured by high- level professional and capital- owning house-
holds (Alvarez- Cuadrado & El- Attar Vilalta, 2018; Piketty & Zucman, 2014; Rognlie, 2015). It is unsurprising that
these three trends are related (Pichelmann, 2015) and that they depend, at least in part, on technical changes in
the period (Gordon, 2014, 2015) and the recent surge in automation and robotics (Lankisch et al., 2019).
In the early 200 0s, levels of real net investment in the advan ced economies began to d ecline. Other things
equal, these s lower rates of capital accu mulation would have slowed the up take of embodied technolo gy and the
growth of total factor prod uctivity (TFP). Indeed , TFP stagnated quite suddenly across the OECD around this tim e
and there h as since been lit tle sign of resurgent growth. At the s ame time, the st eady decline in t he share of the
low- skilled in value- added throughout t he OECD and the transit ional economie s has been widely note d (Autor
et al., 2017; Bloom et al., 2018; OECD, 2012; Trott & Vance, 2018).1 Mos t rece ntly, an assoc iated concer n has be en
with the poor OECD levels of real- wage growth in the post- Global Financial Crisis (GFC) era (Bish op & Chan, 20 19;
Schwellnus, 2019).
Expl anations p osited for th ese obser vations i nclude Eas t Asian com parative growth and trade,2 th e rise of the
propert y rights comp onent of intang ible capital (Kho et al., 2016), the i nteraction bet ween IT develo pment and
the diminution of competition within IT- intensive oligopolies (Autor, 2017; Eeckhout , 2019; Ezrachi & Stucke, 2016;
Moazed & Johnson, 2016) and the wider displacement of workers by increasingl y intelligent machines (Abelians ky
et al., 2020; Ac emoglu & Autor, 2011; Acemog lu & Restrep o, 2015; Autor, 2016; Harris et al., 2018; Krenz
et al., 2018; Suss kind, 2017; Susskind & S usskind, 2015).
In this expand ing literature, it is poss ible, loosely, to separate t he views of ‘techno’ pessi mists and optimist s.
Some p essimis m emerges from Gord on (2014, 2015) , who sees t he major ga ins in cap ital- embodied product ivity
in the past and, in effe ct, recognizes what has become know n as the ‘Solow par adox’,3 the obvious spread of
information technology (IT) in the face of its apparent l ack of evidence in productivity statistics. T his dark side
sees t he potential for automatio n to thre aten the r ole of emp loyment in distributing income.4 As Ford (2015,
2016) sugge sts, the issue i s not that we may no longer have ‘broad- based’ innovation; it is that modern inn ova-
tion may no longer proc ure broad- based prosperit y, le ading to low- skill workers becomin g the ‘precariat’
(Das, 2016a , 2016b).5
By cont rast, tech no- optimists see immense potential for produc tivity an d lifestyl e improvement s from the
further expansion of modern I T, AI and robotics. Mo kyr (2013) and Mokyr et al. (2015) argue that, techn ology
anxiety notwithstanding, we are on the cusp of a new era of progress in innovation that will provide an unprece-
dented boos t to productivit y. Since such strong increases in produ ctivity are yet unobserved, we fo cus on other
determinant s of performance and the e vident technical bias aga inst low- skill labour.
1The compleme ntary rise in t he capital sha re of income is the p rime focus of Piket ty (2014), Pi ketty and Zucm an (2014) and Rog nlie (2015).
Applicat ions to China incl ude those by Flei sher et al. (2010) , Zhou and Song (20 16), Kanbur et al . (2017) and Zh ou and Tyers (2019).
2The roles of Ch ina, and Asian t rade more gener ally, in US labour m arket perfor mance in the 200 0s are explor ed by, among others , Pierce and
Schott (2012), Au tor et al. (2013), Ar ora et al. (2015), Acem oglu et al. (2016) an d Tyers (2015).
3Acemoglu et al . (2016) note Rober t Solow's comme nt in his 1987 New York Times B ook Review ar ticle: “… what ever yone feels to have be en a
technologi cal revolutio n, a drastic cha nge in our produc tive lives, has b een accompan ied everywh ere, includin g Japan, by a slowin g- down of
producti vity growth , not by a step up. You can se e the computer a ge everywhe re but in the produ ctivity st atistics.”
4Key contribut ors include Br ynjolfsso n and McAfee (20 11), OECD (2012), Goo s et al. (2014), He mous and Olsen ( 2014), Avent (2016) ,
Prettner (2 017) and Ba ldwin (2019). Pa rticularl y ardent pessim ists see arti ficial intell igence (AI) as nec essitating an i nevitable “sin gularity” b y which
human influe nce over technol ogy will cease ( Barrat, 2013; Ku rzweil, 2005; Nor dhaus, 2015) and mac hines that are so a daptable tha t they will drive
almost all wor kers out of the pro duction pro cess (Susskind , 2017).
5Another dar k side of the IT revol ution, not add ressed in this pa per, is that informa tion and commun ications tech nologies and co nnectednes s force
profession als and workers in to multiple rel ated tasks, wea kening the gain s from the prior di vision of labou r (Harford, 2018 ; Mark, 2015).
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Tyers and Zhou
To examine the roles of this bia s in historical and continuin g trends in performance , and what fiscal response s
governments might offer to control its undesired effe cts, we develo p an elementa l, stylised general equilibr ium
model calibrate d on the US economy. The model featu res multiple households and a technolog y specification that
allows the separat ion of changes in total factor produc tivity on the one hand and fac tor bias on the other. We use
the model in two related exercises. The first is a retrospective analysis of income inequality in the United States.
The second is a prospective analysis that examines scenarios characterised by differing assumptions about tech-
nological cha nge, population growth a nd fiscal policies.
We begin by summar ising the evidence on total f actor produ ctivity an d factor bias in key OECD c ountries
since 1990. The mode l is then applied to constr uct a decomposition of ob served changes in that p eriod. Changes
in real dispo sable inc omes, the income inequalit y betwee n three represented househol ds and the economy's
wealth to GDP ratio is examined in respo nse to changes in factor abundance, total fac tor product ivity, facto r
bias, th e relative cos t of capit al goods, la bour force p articipation r ates and th e progressivit y of the tax system.
Technological change, featuring bias away from low- skill labour, emerges as the dominant explanators of the rise
in inequalit y in that period.
The mod el is then subj ected to a set of pr ospecti ve shocks over a further tw o decades to ex amine the ef fects of
further changes in factor bias, population growth and its composition,6 and TFP. Unemployment at unprecedented
rates emerges as a possibil ity, made wor se by the ant icipate d populat ion incre ment if its skill conte nt remain s low. In
this contex t, a minimum re al wage, combined with transfer s to support the unemployed is compared with f lexible
wages with ‘earned income ta x credits’. Alternate financing for bot h systems includ es taxes on cap ital income and
consumption.7 The earned in come tax credit system emerges as superior, in combin ation with increased t axation of
cons umpti on expe nditu re. In th e end, how ever, mu ch depe nds on the rate of TFP growth . If it is wea k and the ‘Solow
paradox’ p ersists, there will be no poli tically feasible escape from inc reased transfers . If it is stron g, inequality w ill
continue to increas e, but the prospect of rising une mployment or declining rea l consumption wages is avoidable.
Section 2 revie ws da ta on te chn ica l chan ge an d inco me di str ibut ion in key ad van ced e cono mie s whil e Sec tio n 3
describes the genera l equilibrium framework used to con duct the analysis. Sec tion 4 of fers the decomposition
analysis for the case of the United States over 1990– 2016 and Section 5 addresses prospective shocks and their
distributio nal consequences. Sec tion 6 then concludes.
2 | TECHNOLOGY, FACTOR SHARES AND INEQUALITY IN
ADVANCED ECONOMIES
That incom e inequality has risen acr oss the OECD countries since the 1960s is cl ear from Figure 1. To examine
how much this rising trend in income inequality is driven by the technical change, we first investigate changes in
measured TFP and factor payme nt shares. Two striking trends emerge: a sl owdown in TFP growth and a twist in
shares away from low- skill labour. We then examine the disp ersion of wage incomes in the United States in search
of complementary patterns.
6With respe ct to changes in po pulation and it s skill struc ture, we offer a s tylised exa mination of the fu ture conseque nces detaile d empiricall y by
Bloom et al. (2 018).
7These polic y responses ar e also explore d in a different mo delling conte xt by Prettner a nd Strulik (20 19). They emph asise skill acqu isition in a solel y
prospect ive analysis.
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