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Demand-Driven Labor-Market Polarization

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

No 1398, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We document that income elastic sectors are more intensive in high- and low-skill oc-cupations than income inelastic sectors, which are relatively more middle-skill intensive.As a result, increases in aggregate expenditure have an asymmetric effect on labor demandacross occupations and cause labor-market polarization. We quantify the importance of thisdemand-driven labor market polarization for the US using a general equilibrium modelwith endogenous job assignment and nonhomothetic demand. Our model is calibrated toaggregate variables from 1980 and household-level estimates of sectoral income elasticity.We find that the increase in aggregate expenditure from 1980 to 2016 accounts for 50% of theincrease in the wage bill share of high-skill occupations, 60% of the decline for medium-skilloccupations and virtually all of the increase in the wage bill share of low-skill occupations.This mechanism is also quantiatively important to understand the evolution of labor marketoutcomes across occupations in the period 1950-1980 and in other developed economies.

Date: 2019
New Economics Papers: this item is included in nep-dge, nep-his and nep-tid
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