The benefits of new technologies accrue not only to high-skilled labor but also to owners of capital in the form of higher capital incomes. This increases inequality. To make this argument, we develop a tractable theory that links technology to the personal income and wealth distributions – and not just that of wages – and use it to study the distributional effects of automation. We isolate a new theoretical mechanism: automation increases inequality via returns to wealth. The flip side of such return movements is that automation is more likely to lead to stagnant wages and therefore stagnant incomes at the bottom of the distribution. We use a multi-asset model extension to confront differing empirical trends in returns to productive and safe assets and show that the relevant return measures have increased over time. Automation accounts for part of the observed trends in income and wealth inequality and macroeconomic aggregates.
