Routinization and Covid-19: A Comparison Between the United States and Portugal

Abstract

The purpose of this study is to identify the role of automatization in increasing wage inequality, by comparing the United States to Portugal. Using the PSID and Quadros de Pessoal (Personnel Records), we find that labor income dynamics are strongly determined by the variance of the individual fixed component. This effect is drastically reduced by adding information on workers’ occupational tasks, confirming that a decreasing price of capital and the consequent replacement of routine manual workers have deepened wage inequality. During the current crisis, we find that the ability to keep working is strongly related with the kind of occupation. As such, we foster the impact of a permanent demand shock using an overlapping generations model with incomplete markets and heterogeneous agents to quantitatively predict the impact of Covid-19 and lockdown measures on wage premium and earnings inequality. We find that wage premia and earnings dispersion increase, suggesting that earnings inequality will increase at the expense of manual workers.