How Does Automation Affect Wage Inequality? Evidence from Labor Market Adjustments

Wei Xiong(Meiji Gakuin University)

Abstract

This paper examines how automation affects wage inequality through labor market adjustments. Using a cross-country panel dataset covering multiple economies over the period 1993–2022, we investigate both the direct and indirect effects of robot adoption on wage outcomes. The empirical results show that automation does not have a statistically significant direct effect on overall wage inequality. Instead, its impact operates primarily through changes in labor structure. In particular, automation significantly increases the demand for low-skilled labor, indicating a scale effect driven by productivity gains. At the same time, skilled labor adjusts mainly along the intensive margin through a trade-off between employment and working time, limiting its direct response to automation. The dynamic analysis further reveals a long-run equilibrium relationship among automation, labor supply, and wage outcomes, as well as a bidirectional interaction between automation and labor structure. In addition, the results show substantial heterogeneity across countries, gender groups, and levels of skill composition. Overall, the findings suggest that automation reshapes wage inequality indirectly through labor market adjustments rather than through a direct wage channel. This mechanism helps reconcile the mixed evidence in the existing literature.

Keywords

Automation, Wage Inequality, Labor Supply Dynamics, Buffer Effect, Task-Based Model, Vector Error Correction Model (VECM)

References

.Acemoglu, D. (1998), “Why do new technologies complement skills? Directed technical change and wage inequality”, The Quartely Journal of Economics, 113(4), 1055-1089.

.Acemoglu, D., & Restrepo, P. (2019), “Automation and New Tasks: How Technology Displaces and Reinstates Labor.” Journal of Economic Perspectives, 33(2), 3-30.

.Acemoglu, D. and Restrepo,P. (2022), "Tasks, Automation, and the Rise in U.S. Wage Inequality." Econometrica, 90(5), 1973-2016.

.Baek, S., & Jeong, B. (2023), "Automation, Human Task Innovation, and Labor Share: Unveiling the Role of Elasticity of Substitution."

.Berg, A., Papageorgiou, C., & Vaziri, M. (2023), “Technology’s Bifurcated Bite.” Finance & Development, 60(4), 35-37.

.Card, D., & DiNardo, J. E. (2002), “Skill Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles.” Journal of Labor Economics, 20(4), 733-783.

.Chu, A. C., Cozzi, G., Furukawa, Y., and Liao, C. H. (2023), “Should the government subsidize innovation or automation?” Macroeconomic Dynamics, 27(4), 1059-1088.

.Fortin, N. M. and Lemieux, T. (1997), “Institutional Changes and Rising Wage Inequality”, Journal of Economic Perspective, 11(2), 75-96.

.Goldin, C., & Katz, L. F. (2009), “The race between education and technology.” Inequality in the 21st Century. Routledge, 2018. 49-54.

.Gries, T., & Naudé, W. (2020), “Artificial Intelligence, Income Distribution and Economic Growth.”

.Krusell,P., Ohanian, L,E., Rios-Rull,J. V., Violante, G.L. (2000), “Capital-skill Complementarity and Inequality: A Macroeconomic Analysis,” Econometrica, 68(5), 1029-1053.

.Lankisch, C., Prettner, K. & Prskawetz, A. (2019), “How Can Robots Affect Wage Inequality?” Economic Modelling, 81, 161-169.

.Miyake, A., Muro, K, Nakamura, T., and Yasuoka, M. (2009), “Between-and withingroup wage inequalities, and the advent of new technology.” The Journal of Economic Inequality, 7(4), 387-394.

.Nakamura, H., & Nakamura, M. (2008), “Constant Elasticity of Substitution Production Function: An Endogenous Derivation from a Cobb-Douglas Function.” Macroeconomic Dynamics, 12(5), 694-701.

.Peretto, P.F. & Seater, J.J. (2013), “Factor-Eliminating Technical Change.” Journal of Monetary Economics, 60(4), 459-473.

.Prettner, K. & Strulik, H. (2020), “Innovation, Automation, and Inequality: Policy Challenges in the Race Against the Machine.” Journal of Monetary Economics, 116(C), 249-265.

.Reenen, J.V. (2011), “Wage inequality, technology and trade:21st century evidence”, Labour Economics, 18(6), 730-741.

.Xiong, W. & Muro, K. (2025), “Wage Inequality and Capital Substitution under Automation in a Task-Based Three-Factor Production Function Model”, Working Paper.

DOI: http://dx.doi.org/10.26549/jsbe.v8i1.36253