Technological Innovation and Labor Income Risk
98 Pages Posted: 13 Jul 2020 Last revised: 7 Jun 2021
Date Written: June 1, 2021
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 increase 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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