The Remainder Effect: How Automation Complements Labor Quality

This paper presents a novel way automation can raise wages. Extending the Acemoglu-Restrepo model of automation to consider labor quality, we obtain a Remainder Effect: while automation displaces labor on some tasks, it raises the returns to skill on remaining tasks across skill groups. This effect increases between-firm pay inequality while labor displacement affects within-firm inequality. Using job ad data, we find firm adoption of information technologies leads to both greater requests for diverse skills and higher pay across skill groups. This accounts for most of the sorting of skills to high paying firms that is central to rising inequality.