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Income-driven Labor Market Polarization

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  • Diego A. Comin
  • Ana Danieli
  • Martí 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.

Suggested Citation

  • Diego A. Comin & Ana Danieli & Martí Mestieri, 2020. "Income-driven Labor Market Polarization," NBER Working Papers 27455, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:27455
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    Cited by:

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    2. F. Cerina & A. Moro & M. Rendall, 2020. "A Note on Employment and Wage Polarization in the U.S," Working Paper CRENoS 202002, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    3. David Autor & Caroline Chin & Anna M. Salomons & Bryan Seegmiller, 2022. "New Frontiers: The Origins and Content of New Work, 1940–2018," NBER Working Papers 30389, National Bureau of Economic Research, Inc.
    4. Dilip Mookherjee & Debraj Ray, 2022. "Growth, Automation and the Long-Run Share of Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 1-26, October.
    5. Gillman, Max, 2021. "Steps in industrial development through human capital deepening," Economic Modelling, Elsevier, vol. 99(C).
    6. Gilles Saint-Paul, 2023. "The educated class and the fragility of consumer society," PSE Working Papers halshs-04129252, HAL.
    7. Dalmazzo, Alberto & de Blasio, Guido & Poy, Samuele, 2022. "Can Public Housing Trigger Industrialization?," Journal of Housing Economics, Elsevier, vol. 57(C).

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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