NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Labor Market Polarization and the Great Divergence: Theory and Evidence

Donald R. Davis, Eric Mengus, Tomasz K. Michalski

NBER Working Paper No. 26955
Issued in April 2020
NBER Program(s):International Trade and Investment, Labor Studies

In recent decades, middle-paid jobs have declined, replaced by a mix of high and low-paid jobs. This is labor market polarization. At the same time, initially skilled and typically larger cities have become even more skilled relative to initially less skilled and typically smaller cities. This is the great divergence. We develop a theory that links these two phenomena. We draw on existing models of polarization and heterogeneous labor in spatial equilibrium, adding to these a sharper interaction of individual- and city-level comparative advantage. We then confront the predictions of the theory with detailed data on occupational growth for a sample of 117 French cities. We find, consistent with our theory, that middle-paid jobs decline most sharply in larger cities; that these lost jobs are replaced two-to-one by high-paid jobs in the largest cities and two-to-one by low-paid jobs in the smallest cities; and that the lost middle-paid jobs are concentrated in an upper tier in the large cities and a lower tier in the smaller cities.

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Document Object Identifier (DOI): 10.3386/w26955

 
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