The Labor Market Impact of Technical Change: Inspecting the Mechanisms

Abstract

Motivated by the rise of artificial intelligence (A.I.), we write down a quantitative general-equilibrium model of the labor market impact of occupation-specific technical change. The highly tractable model crystallizes how three fundamental forces shape the impact of technical change on the occupational wage distribution: the input substitution elasticity, the final demand elasticity, and the labor supply (reallocation) elasticity. The difference between the former two elasticities determines whether machines and workers are gross complements, while the reallocation elasticity governs the magnitude of the distributional effects. We estimate the reallocation elasticities, allowing for asymmetric reallocation and associated ripple effects on wages across occupations. With our estimates in hand, we shed light on the general-equilibrium impact of occupation-specific advances in A.I.: wages in administrative services grow the least, ripple effects on less exposed occupations are substantial, A.I. modestly lowers the returns to education and, on average, benefits the poor more.