by Lawrence Schmidt, Massachusetts Institute of Technology
Human capital – that is, an individual’s claim to current and future labor income – is one of the most valuable (and non-tradable) assets in a household’s portfolio, which is also subject to substantial non-diversifiable risk. Moreover, individuals’ retirement contributions, benefits, and savings levels are often tightly linked with labor earnings. While models of income dynamics are central for purposes of evaluating social insurance programs and characterizing optimal retirement savings behavior, our understanding of fundamental drivers of uninsurable risk remains quite incomplete.
The goal of this project is to link firm innovation to the distribution of working to earnings to see to what extent innovation (development of new technologies) is associated with creative destruction of human capital. Technological innovation is a key driver of growth, but it also can involve creative destruction, with new technologies displacing existing ones. When workers’ human capital is attached to a particular set of technologies, innovation that displaces their skillset can subject their labor income to uninsurable risk. This in turn will help us understand the between-firm effects that have contributed to the recent rise in income inequality (Song et al., 2017) and, more broadly, characterize the potential role of changes in technology in driving income risk.