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Some economists believe that the increased inequality that has occurred within many developed countries can be mainly attributed to Automation. Automation, which broadly refers to the adoption of machines and computers in the production process, has become increasingly common across many sectors and countries. For example, the market for industrial robots has experienced a dramatic expansion in the last couple of decades, as shown in Figure 1.

Figure 1 | Annual shipments of industrial robots worldwide (thousand units)^[1]

In the meantime, a number of developed countries have experienced the missing middle phenomenon as shown in Figures 2 and 3 below.

Figure 2 | Projected Job Growth and Mean Annual Wage in the US (2014-24)

Figure 3 | Projected Job Growth and Mean Hourly Wage in the US (2014-24)

a.What is the phenomenon of the missing middle? Please discuss your answer making reference to Figures 2 and 3. (5 marks)

b.Using the price-setting and the wage-setting model, discuss how the trend shown in Figure 1 would affect the labour market. You need to consider two scenarios to explain your answer: i) robots as substitutes for employees endowments; ii) robots as complements to employees endowments by increasing the productivity of labour. (10 marks)

c.Based on this information, occupations with substantial projected job losses are those with the highest wages, which would encourage employers to invest in automation. Is this statement correct or false? Please discuss your answer making reference to Figure 3. (5 marks)

d.Discuss what Figures 2 and 3 tell us about between-country inequality over time. (5 marks)

e.

Discuss how the trend shown in Figures 2 and 3 can explain within-country inequality. (5 marks)

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