Final answer:
Information technology can lead to increased income inequality by acting as a substitute for low-wage workers, decreasing their demand and wages, while simultaneously acting as a complement to high-wage workers, increasing their productivity, demand, and wages.
Step-by-step explanation:
Information technology has differing impacts on high-wage and low-wage labor markets. In the low-wage labor market, technology often serves as a substitute for jobs such as file clerks and telephone receptionists. This substitution effect causes the demand curve for low-wage labor to shift to the left, resulting in reduced demand for these workers and potentially lower wages, as employers can replace human labor with technology.
In contrast, in the high-wage labor market, information technology typically acts as a complement to high-income workers, such as salespeople and managers. This enhances their productivity and ability to oversee more tasks, which shifts the demand curve for high-wage labor to the right, indicating an increased demand for such workers and the potential for higher wages.
The combination of these two shifts – decreased demand and wages in the low-wage labor market, and increased demand and wages in the high-wage labor market – leads to a widening of income inequality. High-wage workers benefit from technology which bolsters their value, while low-wage workers might see their job prospects and wages decline as technology replaces their roles.