Working Paper: CEPR ID: DP14980
Authors: Diego Comin; Mart Mestieri; Ana Danieli
Abstract: We propose a mechanism for labor-market polarization based on the nonhomotheticity of demand that we call the income-driven channel. Our mechanism builds on a novel empirical fact: expenditure elasticities and production intensities in low- and high-skill occupations are positively correlated across sectors. Thus, as income grows, demand shifts towards expenditure-elastic sectors, and the relative demand for low- and high-skill occupations increases, causing labor-market polarization. A calibrated general-equilibrium model suggests this mechanism accounts for 90% and 35% of the increase in the wage-bill share of low- and high-skill occupations observed in the US during 1980-2016, and for 64% and 28% of the rise in the employment shares of low- and high-skill occupations. This mechanism is similarly important for the polarization of labor markets in Western Europe during 1980-2016, as well as in the US during earlier decades and, possibly, the near future.
Keywords: labor market polarization; non-homothetic preferences
JEL Codes: E21; E23; J23; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| household income rises (D19) | labor market outcomes become increasingly polarized (F66) |
| expenditure elasticities positively correlated with production intensities in low and high-skill occupations (J24) | labor market outcomes become increasingly polarized (F66) |
| income-driven channel (G59) | increase in wage bill share of low-skill occupations (J39) |
| income-driven channel (G59) | increase in wage bill share of high-skill occupations (J39) |
| income-driven channel (G59) | change in hours worked by low-skill occupations (J29) |
| income-driven channel (G59) | change in hours worked by high-skill occupations (J29) |
| income-driven channel (G59) | labor market polarization in Western Europe (J48) |