Labor Market Polarization and International

Macroeconomic Dynamics.1

Federico Mandelman (Federal Reserve Bank of Atlanta)

Intermediate Macro at Emory

June 2014

1 Theviews in this paper are solely the responsibility of the author and should not be
interpreted as re‡ecting the views of the Federal Reserve Bank of Atlanta or the Board
of Governors of the Federal Reserve System.
F. S. Mandelman (Atlanta Fed) Labor Polarization and International
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 Middle-Class “Squeeze”

In the last 30 years, middle-skilled workers experienced protracted

job losses in the US.

On the other hand, net job gains obtained at the tails of the skill
distribution (highest/lowest skill)=) Labor Market Polarization.

Other economies witnessed the same phenomena (Acemoglu and

Autor, 2010).

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

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 Labor Market Polarization (Acemoglu and Autor, 2010)

Change in the Share of Employment of occupations ranked by skill

level (approximated by mean wage of each occupation in 1980).

0.4
100xChange in Employment share
0.3

0.2

0.1

-0.1

-0.2
0 20 40 60 80 100

Skill Percentile

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

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 Occupations held by each skill group

Acemoglu and Autor (2011), Jaimovich and Siu (2012) characterize three
broad categories:
Low Skill: Manual
Unskilled service occupations (e.g. janitors, bartenders, home health aides,
and construction workers))Non-Tradables (by nature).

Medium Skill: Routine

“Blue Collar” jobs in manufacturing (e.g. operators, assemblers,
etc.), and administrative and o¢ ce support (e.g. data entry, bank
tellers, sales support, etc.).

High Skill: Cognitive

They require creativity and/or human interaction skills (e.g.
managers, programmers, professionals).

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

() Macro June 2014 4 / 19
 -1.8
-1.7
-1.6
-1.5

-1.85
-1.75
-1.65
-1.55
1983 - Q1

1984 - Q1

1985 - Q1

1986 - Q1

F. S. Mandelman (Atlanta Fed)

1987 - Q1

1988 - Q1

1989 - Q1

1990 - Q1

1991 - Q1

1992 - Q1

1993 - Q1

1994 - Q1

1995 - Q1

1996 - Q1

1997 - Q1

()
1998 - Q1
High Skill (Non-Routine Cognitive)

Labor Polarization and International

1999 - Q1

2000 - Q1

Macro
2001 - Q1

2002 - Q1

2003 - Q1

2004 - Q1
Per Capita Employment (Employment over Population 16+ years)

2005 - Q1

2006 - Q1

2007 - Q1
June 2014

2008 - Q1

2009 - Q1
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 -1.2
-1.1

-1.25
-1.15
-1.05
-1
1983 - Q1

1984 - Q1

1985 - Q1

1986 - Q1

1987 - Q1

F. S. Mandelman (Atlanta Fed)

1988 - Q1

1989 - Q1

1990 - Q1

1991 - Q1

1992 - Q1

1993 - Q1
Medium Skill (Routine)

1994 - Q1

1995 - Q1

1996 - Q1

1997 - Q1

1998 - Q1

()
1999 - Q1

2000 - Q1

Labor Polarization and International

2001 - Q1

2002 - Q1

Macro
2003 - Q1

2004 - Q1

2005 - Q1

2006 - Q1
Per Capita Employment (Employment over Population 16+ years)

2007 - Q1

2008 - Q1

2009 - Q1
June 2014
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 -2.08
-2.06
-2.04
-2.02
-1.98
-1.96
-1.94
-1.92

-2
1983 - Q1

1984 - Q1

1985 - Q1

1986 - Q1

1987 - Q1

F. S. Mandelman (Atlanta Fed)

1988 - Q1

1989 - Q1

1990 - Q1

1991 - Q1

1992 - Q1

1993 - Q1

1994 - Q1

1995 - Q1

1996 - Q1

1997 - Q1

1998 - Q1
Low Skill (Non-Routine Manual)

()
1999 - Q1

2000 - Q1

Labor Polarization and International

2001 - Q1

2002 - Q1

Macro
2003 - Q1

2004 - Q1

2005 - Q1

2006 - Q1
Per Capita Employment (Employment over Population 16+ years)

2007 - Q1

2008 - Q1

2009 - Q1
June 2014
7 / 19
 How to model these facts?

Technology
Acemoglu and Autor (2011), Jaimovich and Siu (2012)

Routine Biased Technological Change7!“Routine Tasks” can be

translated into well-de…ned set of procedures7!It is easy to substitute
technology by labor in those cases (e.g. bank teller by ATM).

Puzzle
Many of these jobs did not disappear, they were o¤shored (e.g.
assemblers to China, telemarketers to India).

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

() Macro June 2014 8 / 19
 Sketch of the Model-Related Literature-

“Trade in Tasks”
Grossman & Rossi-Hansberg (2008)
“For centuries trade entailed an exchange of goods, now involves bits of
value added in many di¤erent locations, or trade in tasks"

Boeing 787 designed in the US, outsourced to 43 suppliers located in

135 cities around the world, in turn, this suppliers also outsource to
other countries.

Firms look for the most e¤ective labor inputs in every country to
accomplish desired tasks 7!Bene…ting skilled workers worldwide.

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

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 Hypothesis-Sketch of the Model

"Globalization" Sizable advances in transportation and

communications in the last thirty years.

Many developing countries reformed and opened up to trade.

Results
Multinationals exploit local specialization.

US specializes in skilled-intensive (cognitive) tasks.

Other tasks with lower (routine intensive) skills are o¤shored to

the rest of the world.

US low-skill service sector (Non-tradables) protected from trade

and bene…ting from increasing demand by high-skill individuals.
F. S. Mandelman (Atlanta Fed) Labor Polarization and International
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 The Emergence of Low-Skill "Service Occupations"

Employment gains for the low-skilled mostly due to "service

occupations." (Autor and Dorn 2013)

These occupations consists on assisting and caring for others.

They include home health aides, janitors, child care, gardeners, and
food service workers (e.g. dishwashers, waiters).

They require little (if any) training...but must be provided

where the …nal consumer is located =)"non-tradables tasks."

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

() Macro June 2014 11 / 19
 The Emergence of Low-Skill Service Jobs.
Change in the Share of Employment of occupations ranked by skill
level (Holding Service Employment at 1980)–

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

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 Assymetric Wages and Employment Outcomes.
Wages rose robustly for the high-skilled, but performed poorly in
middle-skill occupations, same as employment.
However low-skilled wages did not match the strong increase in
low-skill service jobs.

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

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 Immigration and Low-Skilled Jobs.

The share of foreign-born in the US population more than doubled

from 6% to 13% (Hanson & Grogger, 2011)

A disproportionate number of the migrants were relative low-skilled.

Foreign-Born job creation mostly occurred in the low-skill segment.

Native job creation mostly took place in the high-skill segment.

Moreover, Foreign Born were largely employed in “service

occupations” (increased by 439% since 1980).

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

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 Immigration and Low-Skilled Jobs.

Foreign Born vs Natives

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

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 Key Issues

Trade in tasks

“For centuries trade entailed an exchange of goods, now involves bits of

value added in many di¤erent locations, or trade in tasks" (Grossman &
Rossi-Hansberg, 2008)

Migration of unskilled labor

Training of native labor

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

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 Possible Explanation

(1) O¤shoring leads to employment polarization

As o¤shoring costs decrease, multinationals exploit local
specialization.

US specializes in high-skill tasks, where is most e¢ cient, and

middle-skill tasks are o¤shored.

Productivity and wages increase for high-skilled workers) they

demand more non-tradable services.

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

() Macro June 2014 17 / 19
 Possible Explanation

(2) Low-skilled immigration supports employment in services but

dampens wages.

Low-Skilled “Service Occupations” must be executed where the

consumer is located.

Since these tasks are non-tradable, o¤shoring is not an option.

However, labor migration is an alternative to match the increasing

demand.

The increasing in‡ow of immigrants ease the upward pressures on

low-skilled wages.

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

() Macro June 2014 18 / 19
 Possible Explanation

(3) Lowering migration and trade barriers improve welfare

Trade Liberalization: Economy becomes more productive as it

specializes in its most e¢ cient tasks .

Migration Barriers:
Although migrants depress low-skill wages...

They keep US non-tradable prices low, increasing the competitiveness

of skilled workers established in the US.

Low-Skill immigration induces natives to train and acquire skills ,

further boosting productivity– Consistent with the empirical …ndings in
Hunt (2012).

F. S. Mandelman (Atlanta Fed) Labor Polarization and International

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