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Title: Labor Market Polarization and The Great Divergence: Theory and Evidence

Author(s): Donald R. Davis, Eric Mengus and Tomasz Michalski

Publication Date: April 2020

Keyword(s): Great Divergence, inequality, Labor Market Polarization and System Of Cities

Programme Area(s): International Trade and Regional Economics and Monetary Economics and Fluctuations

Abstract: 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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Bibliographic Reference

Davis, D, Mengus, E and Michalski, T. 2020. 'Labor Market Polarization and The Great Divergence: Theory and Evidence'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14623