The structural-demographic theory revisited: An empirical test for industrialized societies.

Abstract

The structural demographic theory for industrialized societies generates three testable predictions. The first prediction is that labor oversupply leads to declining (relative) wages. The second prediction is that labor oversupply leads to elite overproduction: as relative wages fall, elite incomes display a hump-shaped pattern while elite numbers increase. The third prediction is that elite overproduction leads to political instability. I test these predictions on US data by combining evidence from existing studies with empirical proxies for elite numbers and elite income. The predictions are not supported by the data. First, labor oversupply cannot explain the polarization of wages and the decline in relative wages. The largest share in wage variance is explained by automation. Second, the data shows that as relative wages fall, elite incomes increase, in contrast to the hump-shaped pattern displayed by the model. Third, elite overproduction did not predict political instability in the last decades. Political instability is modelled by the Political Stress Index (PSI). The reviewed evidence shows that the increase in the model based PSI in the last decades is driven by the increase in inequality. The rise in inequality was caused by technological change, globalisation and to a lesser extent by the erosion of labor market institutions. Attributing the rise in inequality and the resulting increase in political instability to labor oversupply rather than to the lost race between education and technology may weaken incentives to design effective policies addressing the inefficiencies in the US education system.