Labor Market Dynamism and Job Polarization

Abstract

Over the last two decades labor market dynamism, measured by flows of workers between employers, declined substantially in the US. During the same period employment polarized into low and high skill jobs. This paper shows that the two trends are linked. First, I provide a framework to study employment and worker flows, where skill intensity of jobs and workers’ skills are complements. I analyze within this framework the effects of routine-biased technological change and the increasing supply of college graduates on labor market flows. When routine-biased technological change displaces mid-skill jobs, it lowers the opportunity to move up to better jobs for low-skilled workers. Similarly, high skilled workers have less opportunity to take stepping stone jobs and are more likely to start employment further up the job ladder, reducing the frequency of transitions between employers. The rising share of college graduates puts further pressure on labor markets by increasing competition for jobs from top to bottom. In equilibrium workers trade down to jobs with lower skill intensity to gain employment, but find it harder to move up as they are competing with more highly educated workers. I quantitatively assess whether such mechanisms contribute to the fall in labor market dynamism, by estimating the model using data on labor market flows. I find that routine-biased technological change accounts for 40% of the decline in job-to-job mobility.