Technological Innovation and Labor Income Risk

99 Pages Posted: 13 Apr 2020 Last revised: 18 Nov 2021

See all articles by Leonid Kogan

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Dimitris Papanikolaou

Northwestern University - Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

Lawrence Schmidt

MIT Sloan School of Management

Jae Song

U.S. Social Security Administration

Multiple version iconThere are 3 versions of this paper

Date Written: April 2020

Abstract

Using administrative data from the United States, we document novel stylized facts regarding technological innovation and the riskiness of labor income. Higher rates of industry innovation are associated with significant increases in labor earnings for top workers. Decomposing this result, we find that own firm innovation is associated with a modest increase in the mean, but also variance, of worker earnings growth. Innovation by competing firms is related to lower, and more negatively skewed, future earnings. We construct a structural model featuring creative destruction and displacement of human capital that replicates these patterns. In the model, higher rates of innovation by competing firms increases the likelihood that both the worker and the incumbent producer are displaced. By contrast, a higher rate of innovation by the worker's own firm increases profits, but is a mixed blessing for workers, as it increases odds that the skilled worker is no longer a good match to the new technology. Estimating the parameters of the model using indirect inference, we find significant welfare losses and hedging demand against innovation shocks. Consistent with our model, we find that these left tail effects are more pronounced for process improvements, novel innovations, and are concentrated in movers rather than continuing workers.

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Suggested Citation

Kogan, Leonid and Papanikolaou, Dimitris and Schmidt, Lawrence and Song, Jae, Technological Innovation and Labor Income Risk (April 2020). NBER Working Paper No. w26964, Available at SSRN: https://ssrn.com/abstract=3574429 or http://dx.doi.org/10.2139/ssrn.3574429

Leonid Kogan (Contact Author)

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Dimitris Papanikolaou

Northwestern University - Kellogg School of Management - Department of Finance ( email )

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Lawrence Schmidt

MIT Sloan School of Management ( email )

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Jae Song

U.S. Social Security Administration ( email )

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