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Introduction:
In the realm of technological advancements, the Fourth Industrial Revolution (4IR) blends the physical, digital, and biological domains, offering unprecedented opportunities to reshape economic and social systems (Schwab, 2017). This study delves into the impact of the 4IR on wage levels across 27 OECD economies, focusing on firms driving 4IR technologies, encompassing areas like genetics, artificial intelligence, robotics, nanotechnology, 3D printing, and biotechnology. The 4IR has stirred considerable interest among social scientists, particularly concerning its effects on the labor market and distribution of wealth.
While there is ongoing debate about the potential “technological unemployment” resulting from automation in the 4IR, studies present varying perspectives, with estimates ranging from substantial job risks (Frey and Osborne, 2017) to contrary findings suggesting no significant unemployment (Fu et al., 2020). This paper aims to contribute by examining not only employment but also wage levels, a facet less explored in the context of the 4IR. Current research primarily adopts the Directed Technical Change rationale, exploring the impact of technological progress on wages through Skill-Biased Technical Change (SBTC) and Routine-Biased Technical Change (RBTC) frameworks.
Firm-level studies, crucial for a nuanced understanding, have been limited due to a lack of data on the 4IR and insufficient integration with business establishments as the primary unit of analysis. To bridge this gap, the paper employs a unique dataset from the EPO PATSTAT and ORIBIS-IP, covering 1,228 4IR firms with 22,724 4IR patents from 27 OECD countries between 2010 and 2018.
The study reveals that 4IR technological innovations not only elevate average firm wages but also yield a more significant wage premium than non-4IR innovations. The wage-boosting effect is particularly pronounced in innovative firms in the high-tech sector. Furthermore, the analysis distinguishes between firms innovating in core digital general-purpose technologies (GPT) and those developing non-GPT enabling technologies, highlighting a significant wage-boosting effect in firms focused on core technologies.
This study stands out as the first to provide empirical evidence on the wage outcomes of 4IR innovations at the firm level, emphasizing the role of innovation in shaping wage differentials. The research contributes to the existing literature on the innovation-firm wage nexus, adopting a “rent-sharing” approach and focusing on the inequality of innovation associated with the 4IR. The paper concludes with a discussion of implications, limitations, and potential avenues for future research.
Theoretical background:
The economic and societal repercussions of technological progress have brought increasing attention to the impact of technological innovation on wage levels. Historical evidence from the 2nd and 3rd industrial revolutions suggests that despite concerns about reduced employment, mechanization benefited inventors, consumers, and workers, including unskilled factory workers. Lessons from past technological changes indicate that overall gains gradually benefit an increasing share of the labor force in terms of wages, though it may disadvantage certain occupations.
In the context of the 4th Industrial Revolution (4IR), debates center around the wage consequences of technological change. The literature explores various explanations, including Skill-Biased Technical Change (SBTC) and Routine-Biased Technical Change (RBTC) arguments, linking innovation to dynamic complementarities between technologies and skill levels.
Firm heterogeneity plays a crucial role in explaining wages at the firm level, with the “rent-sharing” hypothesis suggesting that some of a firm’s rents can spill over to wages. Technological innovation can lead to increased wages through Schumpeterian rents, market power derived from technology’s excludable nature, and improved profitability via cost efficiency.
The 4IR, characterized by digital innovation, introduces unique aspects, such as digital non-rivalry (DNV), leading to massive economies of scale and zero marginal costs. This, coupled with the intangible nature of digital innovation, amplifies the wage-boosting effect at the firm level. The main hypothesis posits that firms innovating in the realm of 4IR are expected to pay higher wages.
The discussion on the rent effect of innovation, combined with the peculiarities of 4IR, forms the hypothesis that increased 4IR innovations correlate with higher firm-level wage levels. However, due to the stochastic nature of innovation payoffs, 4IR innovations could also result in firm-level wage differentials.
Conclusions and discussions:
This study investigates how the Fourth Industrial Revolution (4IR) influences the wage levels of firms engaged in digital technology innovation across 27 OECD economies. Unlike previous research focusing on the labor market consequences of digital technology adoption, our emphasis is on innovation. Empirical results reveal a positive impact of 4IR-related innovation on firm wages, aligning with earlier studies on the “rent-sharing” approach. The findings suggest that workers can benefit from innovation-generated rents, particularly in the context of early-stage 4IR technologies. Notably, 4IR innovation yields a significantly higher wage premium at the firm level compared to non-4IR innovation, possibly due to the non-rivalry feature of 4IR technologies.
Furthermore, the study indicates that the positive effects of 4IR innovation are concentrated in high-tech sectors, with core technology innovating firms experiencing a notable wage boost compared to those in low- and medium-tech sectors. This disparity in the impact of 4IR innovation on wages could contribute to increased wage inequalities between sectors, driven by variations in intangible assets among innovative firms.
Policy implications arise from the study, highlighting the need for incentivizing digital innovation and enhancing digital competencies. However, there’s a cautionary note on potential unfavorable consequences for wage equality. Policy makers are urged to adopt measures preventing a “winner-takes-all” scenario in the digital innovation landscape through antitrust regulations. Additionally, income redistribution policies and social initiatives are recommended to address rising income inequalities. Managers are advised to invest in R&D efforts and collaborations in 4IR technologies, emphasizing long-term benefits and competitiveness.
While the study provides valuable insights, it acknowledges limitations, such as the indirect evidence regarding wage inequalities. Future research is encouraged to directly assess the impact of 4IR on overall wage inequality, both between and within firms. Furthermore, expanding the scope to non-OECD countries, especially developing ones, is crucial for a more comprehensive understanding of 4IR’s impact on firm wages.
Source:
Shi, L., Li, S. & Fu, X. (2020). The Fourth Industrial Revolution, Technological Innovation and Firm Wages: Firm-level Evidence from OECD Economies. Revue d’économie industrielle, 169, 89-125. https://doi.org/10.4000/rei.8798