Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244236 
Year of Publication: 
2020
Series/Report no.: 
Working Paper No. 2020-22
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
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 lowand 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 lowand 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.
Subjects: 
Labor-market polarization
Nonhomothetic Demand
JEL: 
E21
E23
J23
J31
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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