Working Paper: CEPR ID: DP14855
Authors: Liwa Rachel Ngai; Orhun Sevinc
Abstract: Low-skill workers are concentrated in sectors that experience fast productivity growth and yet their wages have been stagnating. A multisector perspective is crucial to understand this stagnation as it is not due to an overall stagnation in the marginal product of low-skill workers but a labour reallocation into sectors with slower growth. We show this in a two-sector model where the faster productivity growth causes a fall in the relative price of the low-skill intensive output, which consists of capital and a consumption good that is a complement to the high-skill intensive output. When calibrated to the U.S., the model accounts for a substantial part of the low-skill wage stagnation and its divergence from aggregate productivity during 1980-2010.
Keywords: wage stagnation; wage-productivity divergence; multisector model
JEL Codes: E24; J23; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor reallocation into slower-growing sectors (J69) | Wage stagnation among lowskill workers (F66) |
| Productivity growth (O49) | Fall in relative price of lowskill-intensive output (F66) |
| Fall in relative price of lowskill-intensive output (F66) | Adverse effect on marginal product of lowskill labor (F66) |
| Sector-specific productivity growth (O49) | Relative decline in the product wage of lowskill workers (F66) |
| Reallocation of labor into highskill sectors (J24) | Exacerbation of wage inequality (F66) |
| Sectoral reallocation mechanism (F16) | Divergence between lowskill wages and aggregate productivity (J31) |