How Minimum Wages Affect Automation and Innovation in a Schumpeterian Economy

Chu, Angus C. and Cozzi, Guido and Fan, Haichao and Furukawa, Yuichi and Liao, Chih-Hsing (2020): How Minimum Wages Affect Automation and Innovation in a Schumpeterian Economy.

Abstract

This study explores the effects of minimum wage on automation and innovation in a Schumpeterian growth model. We find that raising the minimum wage decreases low-skilled workers' employment and has an ambiguous impact on innovation and automation. Specifically, suppose the substitution elasticity between low-skilled workers and high-skilled workers in production is less (greater) than unity. In that case, raising the minimum wage leads to an increase (a decrease) in automation and innovation. We also provide a quantitative analysis by simulating the effects of minimum wage on the macroeconomy. Finally, we test our theoretical results by estimating the elasticity of substitution between low-skilled and high-skilled workers and the minimum wage impact on automation and innovation in China.

• Item Type: MPRA Paper
• Language: English
• Keywords: minimum wage, unemployment, innovation, automation
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

References

Acemoglu, D., 1998. Why do new technologies complement skills? Directed technical change and wage inequality. Quarterly Journal of Economics, 113, 1055-1089.

Acemoglu, D., 2002a. Directed technical change. Review of Economic Studies, 69, 781-809.

Acemoglu, D., 2002b. Technical change, inequality, and the labor market. Journal of Economic Literature, 40, 7-72.

Acemoglu, D., 2003. Patterns of skill premia. Review of Economic Studies, 70, 199-230.

Acemoglu, D., Aghion, P., Bursztyn, L., and Hemous, D. 2012. The environment and directed technical change. American Economic Review, 102, 131-166.

Acemoglu, D., and Akcigit, U., 2012. Intellectual property rights policy, competition and innovation. Journal of the European Economic Association, 10, 1-42.

Acemoglu, D., and Autor, D., 2011. Skills, tasks and technologies: Implications for employment and earnings. Handbook of Labor Economics (edited by O. Ashenfelter and D. Card), 4, 1043-1171.

Acemoglu, D., Gancia, G., and Zilibotti, F., 2015. Offshoring and directed technical change. American Economic Journal: Macroeconomics, 7, 84-122.

Acemoglu, D., and Zilibotti, F., 2001. Productivity differences. Quarterly Journal of Economics, 116, 563-606.

Acemoglu, D., and Restrepo, P., 2018. The race between man and machine: Implications of technology for growth, factor shares and employment. American Economic Review, 108, 1488-1542.

Agenor, P.-R., and Lim, K., 2018. Unemployment, growth and welfare effects of labor market reforms. Journal of Macroeconomics, 58, 19-38.

Aghion, P., and Howitt, P., 1992. A model of growth through creative destruction. Econometrica, 60, 323-351.

Aghion, P., Jones, B., and Jones, C., 2017. Artificial intelligence and economic growth. NBER Working Paper No. 23928.

Alesina, A., Battisti, M., and Zeira, J., 2018. Technology and labor regulations: Theory and evidence. Journal of Economic Growth, 23, 41-78.

Angrist, J., 1995. The economic returns to schooling in the West Bank and the Gaza Strip. American Economic Review, 85, 1065-1087.

Akerlof, G., and Yellen, J., 1990. The fair wage-effort hypothesis and unemployment. Quarterly Journal of Economics, 105, 255-283.

Askenazy, P., 2003. Minimum wage, exports and growth. European Economic Review, 47, 147-164.

Behar, A., 2009. Directed technical change, the elasticity of substitution and wage inequality in developing countries. Economic Series Working Papers 467, University of Oxford, Department of Economics.

Ben-Gad, M., 2008. Capital-skill complementarity and the immigration surplus. Review of Economic Dynamics, 11, 335-365.

Cai, H., and Liu, Q., 2009. Competition and corporate tax avoidance: Evidence from Chinese industrial firms. Economic Journal, 119(537), 764--795.

Cengiz, D., Dube, A., Lindner, A., and Zipperer, B., 2019. The effect of minimum wages on low-wage jobs. Quarterly Journal of Economics, 134, 1405-1454.

Chen, G., and Hamori, S., 2009. Economic returns to schooling in urban China: OLS and the instrumental variables approach, China Economic Review. 20, 143-152.

Chen, J., and Roth, J., 2024. Logs with zeros? Some problems and solutions. The Quarterly Journal of Economics, 139(2), 891--936.

Chen, Y., Fang, M., and Wang, X., 2026. (Mis)use of power in the ivory tower: Evidence from deans in Chinese universities. Journal of Economic Behavior & Organization, 242, 107419.

Chu, A., Cozzi, G., and Furukawa, Y., 2015. Effects of economic development in China on skill-biased technical change in the US. Review of Economic Dynamics, 18, 227-242.

Chu, A., Cozzi, G., and Furukawa, Y., 2016. Unions, innovation and cross-country wage inequality. Journal of Economic Dynamics and Control, 64, 104-118.

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

Chu, A., Fan, H., Furukawa, Y., Kou, Z., and Liu, X., 2021. Minimum wages, import status, and firms' innovation: Theory and evidence from China. Economic Inquiry, 59, 441-458.

Chu, A., Kou, Z., and Liu, X., 2018. Labor union and the wealth-income ratio. Economics Letters, 167, 29-35.

Chu, A., Kou, Z., and Wang, X., 2020. Dynamic effects of minimum wage on growth and innovation in a Schumpeterian economy. Economics Letters, 188, 108943.

Ciccone, A., and Peri, G., 2005. Long-run substitutability between more and less educated workers: Evidence from U.S. states, 1950-1990. Review of Economics and Statistics, 87, 652-663.

Cohn, J.B., Liu, Z., and Wardlaw, M.I., 2022. Count (and Count-Like) data in finance. Journal of Financial Economics, 146(2), 529--551.

Coviello, D., Deserranno, E., and Persico, N., 2022. Minimum wage and individual worker productivity: Evidence from a large US retailer. The Journal of Political Economy, 130(9), 2315--2360.

Cozzi, G., Giordani, P., and Zamparelli, L., 2007. The refoundation of the symmetric equilibrium in Schumpeterian growth models. Journal of Economic Theory, 136, 788-797.

Davidson, C., and Segerstrom P., 1998. R&D subsidies and economic growth. RAND Journal of Economics, 29, 548-577.

Dinopoulos, E., and Segerstrom, P., 2010. Intellectual property rights, multinational firms and economic growth. Journal of Development Economics, 92, 13-27.

Downey, M., 2021. Partial automation and the technology-enabled deskilling of routine jobs. Labour Economics, 69, 101973.

Evans, L., Quigley, N., and Zhang, J., 2003. Optimal price regulation in a growth model with monopolistic suppliers of intermediate goods. Canadian Journal of Economics, 36, 463-474.

Fan, H., Lin, F., and Tang, L., 2018. Minimum wage and outward FDI from China. Journal of Development Economics, 135, 1-19.

Fang, T., and Lin, C., 2014. Minimum wages and employment in China. IZA Journal of Labor Policy, 4, 22.

Gancia, G., and Bonfiglioli, A., 2008. North-South trade and directed technical change. Journal of International Economics, 76, 276-295.

Ge, S., and Yang, D.T., 2014. Changes in China's wage structure. Journal of the European Economic Association, 12, 300-336.

Grossman, G., and Helpman, E., 1991. Quality ladders in the theory of growth. Review of Economic Studies, 58, 43-61.

Hassler, J., Krusell, P., Olovsson, C., 2021. Directed technical change as a response to natural resource scarcity. Journal of Political Economy, 129, 3039-3072.

Hemous, D., and Olsen, M., 2022. The rise of the machines: Automation, horizontal innovation and income inequality. American Economic Journal: Macroeconomics, 14, 179-223.

Howitt, P., 1999. Steady endogenous growth with population and R&D inputs growing. Journal of Political Economy, 107, 715-730.

Ji, L., Chang, J., and Huang, C., 2016. Unionization, market structure, and economic growth. Southern Economic Journal, 82, 935-951.

Jones, C., and Williams, J., 2000. Too much of a good thing? The economics of investment in R&D. Journal of Economic Growth, 5, 65-85.

Karabarbounis, L., and Neiman, B., 2014. The global decline of the labor share. Quarterly Journal of Economics, 129, 61-103.

Katz, L., and Autor, D., 1999. Changes in the wage structure and earnings inequality. Handbook of Labor Economics (edited by O. Ashenfelter and D. Card), 3, 1463-1554.

Logan, G., and Neumark, D., 2018. People versus machines: The impact of minimum wages on automatable jobs. Labour Economics, 52, 40-53.

Meckl, J., 2004. Accumulation of technological knowledge, wage differentials, and unemployment. Journal of Macroeconomics, 26, 65-82.

Mortensen, D., and Pissarides, C., 1998. Technological progress, job creation, and job destruction. Review of Economic Dynamics, 1, 733-753.

Neumark, D., 2018. Employment effects of minimum wages. IZA World of Labor, 6v2.

Parello, C., 2010. A Schumpeterian growth model with equilibrium unemployment. Metroeconomica, 61, 398-426.

Peretto, P., 2011. Market power, growth, and unemployment. Frontiers of Economics and Globalization, 11, 493-525.

Peretto, P., and Seater, J., 2013. Factor-eliminating technological change. Journal of Monetary Economics, 60, 459-473.

Prettner, K., and Strulik, H., 2020. Innovation, automation, and inequality: Policy challenges in the race against the machine. Journal of Monetary Economics, 116, 249-265.

Psacharopoulos, G., and Hinchliffe, K., 1972. Further evidence on the elasticity of substitution among different types of educated labor. Journal of Political Economy, 80, 786-792.

Romer, P., 1990. Endogenous technological change. Journal of Political Economy, 98, S71-S102.

Sabia, J., 2015. Do minimum wages stimulate productivity and growth?. IZA World of Labor, 221.

Segerstrom, P., Anant, T., and Dinopoulos, E., 1990. A Schumpeterian model of the product life cycle. American Economic Review, 80, 1077-91.

The Economist, 2016. Employment down, productivity up?. The Economist Group Limited, 1 April 2016.

Zeira, J., 1998. Workers, machines, and economic growth. Quarterly Journal of Economics, 113, 1091-1117.

Zeira, J., 2006. Machines as engines of growth. CEPR Discussion Paper No. 5429.