Technological Progress, Luck, and the Variability of Earnings

This paper develops a theoretical model to analyse how the arrival of a new technology embodied in capital affects the variability of earnings when workers’ adaptability to new technologies is subject to random events (luck) that can be history dependent. It is argued that technological change can leverage the importance of these stochastic factors and increase earnings instability in three ways. First, a rise in the speed of embodied technological progress raises the market premium to the lucky workers adaptable to the leading-edge technology. Second, the generality of the technology raises the ability of adaptable workers to transfer recently aquired knowledge to new machines and reduces the cost of retooling old machines, which increases the demand for adaptable workers. Third, the reduction in organizational knowledge about mature machines reduces the wage of those unlucky workers that cannot operate leading-edge machines.