Labor market polarization in Britain and Germany: A cross-national comparison using longitudinal household data

Abstract

Since the 1980s, the share of employment for mid-wage occupations in many advanced countries has decreased while wages for the same occupations have declined relative to the top and bottom of the distribution. The hypothesized explanation of this employment and wage polarization is a phenomenon called Routine-Biased Technical Change (RBTC), wherein new machines and computers substitute for workers in mid-wage occupations that have a high content of routine tasks. Taking advantage of panel data for Britain and Germany, this study follows the work of Cortes (2016) and examines the occupational mobility of workers between occupations that vary in the intensity of routine tasks. Among workers in routine occupations, higher unobserved skills are positively related to switching to higher-paid, non-routine cognitive occupations, while those who have lower levels of unobserved skills are more likely to move to lower-paid, non-cognitive manual occupations. This occupational mobility has resulted in faster future wage growth for all job switchers relative to those who stayed in the routine occupations. The wage polarization found in the British labor market resembles that observed in the US by Cortes (2016) in that routine workers transit down to manual jobs and upwards to cognitive jobs. However, in Germany, which is characterized by different educational and labor market institutions, most workers move from routine occupations to more highly compensated cognitive ones in the face of automation.