Abstract
A common hypothesis for labor market polarization is that technological progress has decreased the price of machines which are substitutable with middle skilled jobs and complementary to higher and lower skilled jobs. I quantitatively evaluate this hypothesis in a dynamic general equilibrium model. I find that the near constant elasticities of labor demand in the standard technology hypothesis and the observed dynamics of the price of machines are inconsistent with rapid polarization pre-2000 and its slower dynamics thereafter. Extending the model to allow for a separate investment sector requiring only high skilled workers generates a much closer fit to data.
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