Saturday, February 2, 2013

The link between recessions and the shrinking of the middle class

In the past 30 years, the US labor market has seen the emergence of two new phenomena: "job polarization" and "jobless recoveries." Job polarization refers to the increasing concentration of employment in the highest- and lowest-wage occupations, as job opportunities in middle-skill occupations disappear. Jobless recoveries refer to periods following recessions in which rebounds in aggregate output are accompanied by much slower recoveries in aggregate employment. We argue that these two phenomena are related. ...

First, job polarization is not simply a gradual phenomenon: the loss of middle-skill, routine jobs is concentrated in economic downturns. Specifically, 92% of the job loss in these occupations since the mid-1980s occurs within a 12 month window of NBER dated recessions (that have all been characterized by jobless recoveries).

Our second point is that job polarization accounts for jobless recoveries. This argument is based on three facts. First, employment in the routine occupations identified by Autor et al. (2003) and others account for a significant fraction of aggregate employment; averaged over the jobless recovery era, these jobs account for more than 50% of total employment. Second, essentially all of the contraction in aggregate employment during NBER dated recessions can be attributed to recessions in these middle-skill, routine occupations. Third, jobless recoveries are observed only in these disappearing, middle-skill jobs. The high- and low-skill occupations to which employment is polarizing either do not experience contractions, or if they do, rebound soon after the turning point in aggregate output. Hence, jobless recoveries can be traced to the disappearance of routine occupations in recessions. Finally, it is important to note that jobless recoveries were not observed in routine occupations (nor in aggregate employment) prior to the era of job polarization.