Income-Driven Labor Market Polarization

CEPR Discussion Paper No. DP14980

71 Pages Posted: 27 Jul 2020 Last revised: 16 Aug 2020

See all articles by Diego Comin

Diego Comin

Harvard University - Business School (HBS)

Martí Mestieri

Northwestern University

Ana Danieli

Northwestern University

Date Written: July 2020

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 Classification: E21, E23, J23, J31

Suggested Citation

Comin, Diego and Mestieri, Martí and Danieli, Ana, Income-Driven Labor Market Polarization (July 2020). CEPR Discussion Paper No. DP14980, Available at SSRN: https://ssrn.com/abstract=3650093

Diego Comin (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Martí Mestieri

Northwestern University

2001 Sheridan Road
Evanston, IL 60208
United States

Ana Danieli

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

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