What Drives Labor Market Polarization in Advanced Countries? The Role of China and Technology

This paper explores the effects of offshoring, technology and Chinese import competition on labor market polarization in European countries. We find that polarization occurs mostly as a result of polarization within individual industries, while the reallocation of employment away from less polarized industries towards more highly polarized industries contributed only about one third of the total change. We find that both technological change and Chinese net import competition contributed to labor market polarization, but that they did so in distinct ways. In European manufacturing industries, ICT adoption explains a third of within-industry polarization, while Chinese net import competition contributed to a much smaller extent. The process of between-industry polarization is driven by widespread deindustrialization and servitization in developed countries. We find that Chinese net import competition explains about a fifth of the employment decline in lowly-polarized manufacturing industries and was thus an important driver of the reallocation of labor within economies away from lowly polarized manufacturing industries. We present tentative evidence that employment grew faster in initially highly polarized service industries. Moreover, these industries appear unaffected by their indirect IO-exposure to Chinese net import competition, while this was not the case for initially lowly polarized service industries. While polarization patterns in different European labor markets show considerable heterogeneity, labor market institutions seem to be insufficient to explain these cross-country differences.