Does Digitalization Widen Labor Income Inequality?

ABSTRACT We develop a growth model that endogenizes the occupational choice of workers with different ability levels to study how digitalization affects labor income inequality. The framework incorporates digitalization's multifaceted effects on the economy: (i) it influences economic growth through automation, and (ii) it affects labor income inequality through labor productivity (demand side) and labor time modulation (supply side). We examine how these channels influence wage inequality between skilled and unskilled workers, within each skill group, and economy‐wide. The analysis reveals that digitalization's impact on labor income inequality—whether exacerbating or mitigating disparities—depends on the inequality metric employed.