Board of Governors of the Federal Reserve System

August 2013

The Dynamics of Labor Market Polarization

Christopher L. Smith

Abstract:

It has been well documented that the share of the working-age population employed in "middle-skill" occupations has been falling for some time, while the share in lower- and higher-skill jobs has been rising--i.e. "polarization" of the labor market (e.g. Autor 2010). However, the dynamics and related mechanism behind these employment trends are not fully understood; nor is it well understood what happens to workers who are displaced from middle-skill jobs. In this paper, I use data from the matched monthly CPS, the March CPS supplement, and the Displaced Worker Survey to answer two primary questions. First, into what employment states or occupations do unemployed persons who were formerly employed in low-, middle-, or high-skill occupations transition? Second, how have transitions between job types and employment states changed over time, and how have these changes contributed to trends in employment shares by job-type? I find that the decline in the share of workers in middle-skill jobs is due both to a decline in inflows into these jobs (particularly from non-employment and for younger workers) and because of a rise in outflows from these jobs (to non-employment and to other jobs); the increase in the share of workers in lower-skill jobs appears due to an increase in worker transitions from other job types (evident within all demographic groups); and the increase in the share of workers in higher-skill jobs appears due to an increase in worker transitions from other job types and is also somewhat compositional in nature (because there are more college-educated workers).

Keywords: Labor demand, labor market polarization, polarization, job transitions, occupational change

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