Technological Innovation and Labor Income Risk

WP#2020-10

Abstract

This paper examines the relationship between technological progress and the riskiness of labor income using employer-employee matched income data from the United States. Results suggest innovation is associated with a substantial increase in the labor income risk, especially for workers at the top of the earnings distribution.

The paper found that:

  • Motivated by a simple model of creative destruction, the researchers draw a distinction between technological innovation advanced by the firm or its competitors. Own firm innovation is associated with a modest increase in worker earnings growth, while innovation by competing firms is related to lower future worker earnings.
  • Importantly, these earnings changes are asymmetrically distributed across workers: both gains and losses are concentrated on a subset of workers, which implies that the distribution of worker earnings growth rates becomes more right- or left-skewed following innovation by the firm, or its competitors, respectively.
  • Simulations reveal that the increased disparity in innovation outcomes across firms in the 1990s can account for a significant part of the recent rise in income inequality.

 
The policy implications of the findings are:

  • This analysis speaks to the relationship between technological change and individual earnings risk, a crucial input to any assessment of social insurance (including SSA) programs. These results improve our understanding of fundamental frictions, which make it difficult to share risks in the labor market. First, changes in technology may displace demand for a particular worker’s skill set, a source of persistent downside risk. Second, shifts in technology may reduce the scope for workers to receive insurance from within the firm, since current employers may also be displaced following periods of high innovation.
  • Groups of workers whose earnings risk appears to increase following new technological developments are also more likely to apply for Social Security Disability Insurance benefits. This result suggests that changes in expected future earnings levels and risk affect incentives for individuals to claim program benefits.