Working Paper: NBER ID: w27455
Authors: Diego A. Comin; Ana Danieli; Mart Mestieri
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; Income-Driven Channel; Expenditure Elasticities
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 |
|---|---|
| Aggregate household income (D31) | Labor market outcomes (J48) |
| Aggregate household income (D31) | Demand for high-skill occupations (J24) |
| Aggregate household income (D31) | Demand for low-skill occupations (J29) |
| Aggregate household income (D31) | Demand for middle-skill occupations (J29) |
| 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) |
| Rising income (E25) | Shifts in demand towards sectors using high and low-skill workers (J29) |