DP14623 Labor Market Polarization and The Great Divergence: Theory and Evidence

Author(s): Donald R. Davis, Eric Mengus, Tomasz Michalski
Publication Date: April 2020
Keyword(s): Great Divergence, inequality, Labor Market Polarization, System Of Cities
JEL(s): J21, R12, R13
Programme Areas: International Trade and Regional Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14623

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.