Income-Driven Labor-Market Polarization

Diego Comin, Ana Danieli () and Martí Mestieri

No WP-2020-22, Working Paper Series from Federal Reserve Bank of Chicago

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)
Pages: 47
Date: 2020-10-23
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (8)

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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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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhwp:92692

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DOI: 10.21033/wp-2020-22

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