Income-Driven Labor-Market Polarization

Diego Comin, Ana Danieli and Martí Mestieri
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Ana Danieli: Northwestern University

No 2020-050, Working Papers from Human Capital and Economic Opportunity Working Group

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; nonhomothetic demand (search for similar items in EconPapers)
JEL-codes: E21 E23 J23 J31 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-lma, nep-mac and nep-tid
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Citations: View citations in EconPapers (6)

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http://humcap.uchicago.edu/RePEc/hka/wpaper/Comin_ ... ket-polarization.pdf First version, June 22, 2020 (application/pdf)
http://humcap.uchicago.edu/RePEc/hka/wpaper/Comin_ ... -polarization_r1.pdf Second version, June 27, 2020 (application/pdf)
http://humcap.uchicago.edu/RePEc/hka/wpaper/Comin_ ... ket-polarization.pdf Online appendix, June 27, 2020 (application/pdf)

Related works:
Working Paper: Income-Driven Labor Market Polarization (2020)
Working Paper: Income-Driven Labor-Market Polarization (2020)
Working Paper: Income-driven Labor Market Polarization (2020)
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