Labor-Eliminating Technology, Wage Inequality and Trade Protectionism

Rapid automation in manufacturing has raised pressing questions in public and policy discourse regarding the effects of a labor-eliminating technical progress in an industry. We address the implications of a labor-eliminating technology adopted in manufacturing for factor price changes, for skilled and unskilled wage gap, and for trade policies intending to protect workers. Using an otherwise traditional multi-sector general equilibrium model, we derive the conditions under which a labor-eliminating technology will be adopted in manufacturing, and show that such a technical change in manufacturing will increase the rate of return on capital, and decrease both skilled and unskilled labor wages. We derive conditions under which wage inequality increases, and most importantly, we show that implementing protectionist trade policies in the industry experiencing a labor-eliminating technical progress will paradoxically hurt the workers that the policy is meant to protect.