The Polarization of the U.S. Labor Market

Abstract

This paper analyzes a marked change in the evolution of the U.S. wage structure over the past fifteen years: divergent trends in upper-tail (90/50) and lower-tail (50/10) wage inequality. We document that wage inequality in the top half of distribution has displayed an unchecked and rather smooth secular rise for the last 25 years (since 1980). Wage inequality in the bottom half of the distribution also grew rapidly from 1979 to 1987, but it has ceased growing (and for some measures actually narrowed) since the late 1980s. Furthermore we find that occupational employment growth shifted from monotonically increasing in wages (education) in the 1980s to a pattern of more rapid growth in jobs at the top and bottom relative to the middles of the wage (education) distribution in the 1990s. We characterize these patterns as the "polarization" of the U.S. labor market, with employment polarizing into high-wage and low-wage jobs at the expense of middle-wage work. We show how a model of computerization in which computers most strongly complement the nonroutine (abstract) cognitive tasks of high-wage jobs, directly substitute for the routine tasks found in many traditional middle-wage jobs, and may have little direct impact on non-routine manual tasks in relatively low-wage jobs can help explain the observed polarization of the U.S. labor market. wage inequality. The growth in overall wage inequality was most rapid during the 1980s, and involved a spreading out of the entire wage distribution. Rapid secular growth in the demand for skills, partly driven by skill-biased technical change (SBTC), combined with a sharp slowdown in the growth of the relative supply of college workers (starting in the early 1980s) help to explain these wage changes. The erosion of labor market institutions protecting low-and middlewage workers-the minimum wage and unions-further contributed to rising wage inequality, especially during the 1980s.Recent work challenges these conclusions emphasizing a slowdown in the growth of U.S.wage inequality over the last fifteen years (David Card and John DiNardo 2002; Thomas Lemieux 2006). This "revisionist" literature views the surge in wage inequality of the 1980s as an "episodic" event driven by institutional forces and argues that the more "modest" inequality growth in the 1990s is inconsistent with a key role for SBTC and other market forces.In this paper, we reconsider this revisionist view, focusing on a marked change in the evolution of the U.S. wage structure over the past 15 years: divergent trends in upper-and lowertail wage inequality. In Section I, we document that wage inequality in the top half of the distribution has exhibited an unchecked secular rise for the last 25 years (since 1980), but it has ceased growing since the late 1980s (and for some measures narrowed) in the bottom half of the distribution. In Section II, we show that the pattern of employment growth differed sharply in the 1990s versus the 1980s with more rapid growth of employment in jobs (occupations) at the bott...

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