A polarized future for our labor market?

An article earlier this week in The Financial Times on wage growth across all skill levels (opens in a new tab) raises concerns that the United States can no longer provide middle-skill jobs that provide higher wage jobs for a broad swath of the American public. The piece captures the angst about the U.S. labor market: a slow-growing economy that has resulted in tepid wage growth in the short-run and long-term fears of a hollowed-out labor market.

Recent research shows there is reason to be concerned about the long-term trend. Two new papers detail how the U.S. labor market is hollowing out and offer a slightly dim picture of future trends. The two papers provide more evidence about a well-known hypothesis (opens in a new tab) that posits job polarization is the main reason why income inequality has been growing over the past 40 years.

A new working paper (opens in a new tab) from the National Bureau of Economic Research gives some new insight into how job polarization has evolved since the 1976. The paper, by economists Guido Matias Cortes, Nir Jiamovich, Chirstopher Nekarda, and Henry Siu, looks at flows into and out of employment in occupations focused on routine tasks. They find that changes in three flow categories are the most significant:

• From unemployment to employment in routine occupations
• From labor force non-participation to routine employment
• And from routine employment to labor force non-participation

They also find that the shift is not due to demographics. The changes are due to shifts in the propensity to switch from routine employment to another labor market status or from another status to routine employment. This means polarization hasn’t happened because the labor force has gotten older but rather because something has changed in the labor market.

What’s more, they find that the change in propensities has been most significant for young workers. As the authors put it, “[o]ur findings suggest that changes in the occupational choices of young workers play a prominent role in accounting for the decline of routine employment.” In short, routine employment is disappearing in part because young people aren’t entering those occupations.

A paper (opens in a new tab) by economist Christopher Smith at the Board of Governors of the Federal Reserve finds a similar result. Smith looks at flows into and out of middle-skill, low-skill and high-skill jobs. He finds that the decline in middle-skilled, or routine, jobs can be explained in large part by a decline of inflows to those jobs by younger workers. He also discovers that the share of higher-skill jobs has increased in part because more workers are college-educated.

These two papers highlight the underlying trends that are driving the job polarization of the past 40 plus years. Understanding these dynamics can help academics and policymakers develop strategies for creating a less polarized and more inclusive labor market.