The Missing Middle: Job Polarization and Income Inequality

 

Takeaway

  • Job polarization occurs when there are large increases in high-skill jobs and low-skill jobs, but not middle-skill jobs
  • Technological change and globalization are the two main forces behind polarization
  • The gap in wages between those at the top of the skill distribution and those at the bottom has widened

One of the important problems in the current labor market is that jobs in the middle are going away. At the same time, we’re creating high-skill jobs (which is a good thing) and low-skill jobs (which have to be done locally because they are service jobs). A middle-income lifestyle is becoming more difficult to attain without a college degree.

This is not a problem that will be fixed by economic recovery or growth. Most of these middle-skill jobs are lost during recessions, and they don’t return during recovery. So, recovery may stop the losses, but it doesn’t return everything to “the way it was.”  My pessimistic view is that President Obama will not be able to do anything to change our education system. The problems are much deeper than how much we spend or what incentives we offer.

With all that said, here are the key ideas from a paper on the subject by New York Fed senior economist Jaison R. Abel and vice president Richard Deitz. Most of this is lifted directly from the paper and represents the authors’ work (not mine).

Economic Forces Behind Job Polarization

  1. Over the past three decades, we’ve seen a much larger increase in high-skill jobs and low-skill jobs, but not middle-skill jobs. This is referred to as job polarization.
  2. Technological change and globalization are the two main forces behind polarization. (Automation and relatively low-cost labor from other countries have displaced routine work done by middle-skill workers.)
  3. Technology has generated opportunities for those who create technology or those who use it in their job. But, middle-skill workers, whose tasks are well defined and easily codified, have been displaced by technology.
  4. Middle-skill jobs in manufacturing have been displaced by lower-cost labor.
  5. Low-skill jobs have been protected because many service jobs require physical proximity or face-to-face contact.
  6. In addition to globalization and technology, a third factor has driven the polarization. The third factor is the increase in demand for services (as the U.S. has become richer). Middle-skill jobs are often goods-producing. High-skill and low-skill jobs are often service jobs. (Health care is a good example.) Service sector jobs are less susceptible to displacement by technology or global competition.

Job Polarization in the United States

  1. High-skill jobs tend to require cognitive skills, abstract thinking, coordination of activity and decision making.  See Chart 1 below. 
  2. Middle-skill jobs are susceptible to displacement.
  3. From 1980 to 2010, the number of jobs doubled for the high-skill group and nearly doubled for the low-skill group. By contrast, the upper-middle group grew at 46 percent and the lower-middle skill grew by 20%. See Chart 2 below. 

The Widening Gap in Wages

  1. The gap in wages between those at the top of the skill distribution and those at the bottom has widened. This has largely been driven by wage growth for the highest paid group. See Chart 4 below. 
  2. Workers in the high-skill group increased productivity. Technology and globalization have complemented the tasks they perform.
  3. In addition, the supply of college graduates has failed to keep pace with growing demand for them.  (This has also led to higher wages for high-skilled workers.)
  4. Low skill wages have actually increased more than middle-skill wages. If middle-skill workers start looking for low-skill jobs, that extra supply should push wages down. But, their higher productivity may warrant higher wages. In addition, higher demand for services may increase wages.

One final note about the paper: It seems to me that the paper classifies jobs as high-, middle- or low-skill based on the salary that job pays. I’m not sure that this is perfect. For example, I’m not sure that I would classify public school teachers as middle-skill. Rather, I think that their salaries are commensurate with higher-skill workers, but they are adjusted lower for the fact that they don’t work summers (and their pensions have historically been more generous).

McCombs Distinguished Senior Lecturer Sandy Leeds provides analysis of key market issues on his blog, Leeds on Finance, where this article originally appeared. 

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.

About The Author

Sandy Leeds

Distinguished Senior Lecturer, Department of Finance, McCombs School of Business, The University of Texas at Austin

Sandy Leeds, CFA is a Distinguished Senior Lecturer at The University of Texas at Austin. He teaches graduate level classes in the MBA program and...

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