Wage Polarization Research Articles

Managing the Twin Faces of AI: A Commentary on “Is AI Changing the World for Better or Worse?”

This commentary explores the transformative potential and inherent risks associated with artificial intelligence (AI), particularly generative AI. It focuses on the dual nature of AI, where it offers substantial benefits in industries like retailing, and social media, while also presenting challenges related to ethics, privacy, and job displacement. The article introduces a framework to analyze AI's organizational impact, categorizing outcomes based on how AI supports or disrupts the status quo. It discusses AI's contribution to operational efficiency, demand expansion, and business transformation, acknowledging both the promise of enhanced customer experiences and the peril of ethical dilemmas such as algorithmic bias and data privacy concerns. It explores real-world applications of AI, such as personalized customer engagement and healthcare diagnostics. At the same time, the article critically examines negative implications, including job displacement, wage polarization, and the erosion of human connection in customer service. The commentary offers a balanced perspective, urging businesses and policymakers to embrace Responsible AI principles like fairness, reliability, and accountability. The article projects the future of AI, particularly advancements in agentic AI, artificial general intelligence (AGI), and artificial superintelligence (ASI), as holding both enormous potential and severe risks. It concludes by calling for a thoughtful, regulated approach to AI development to ensure it serves the greater good while mitigating its risks.

글로벌 가치사슬에서의 위치가 임금에 미치는 영향

This study analyses the impact of Korean manufacturing's position in the global value chain on wages, i.e., estimates the impact of the relative position of Korean manufacturing on the smile curve, which represents the relationship between production stage and value added in the global value chain. The main findings of the analysis are as follows. First, we find that wages are higher at the top and bottom of the value chain in Korean manufacturing. Second, we estimate an interaction between occupational category and the smile curve and find that the wage effect of the smile curve is pronounced for production workers, but not for white collar workers. For production workers, wages are relatively higher at the top and bottom of the value chain, meaning that even within the same production occupation, there are differences in wages depending on the position in the manufacturing value chain. This suggests that productivity and wages need to improve in the middle of the value chain to mitigate the wage polarisation within the same occupation in manufacturing.

The Mutual Influence of Labour Market Polarisation, Wage Polarisation and Political Polarisation in the European Union

Abstract The aim of the paper is to prove a hypothesis concerning the dependence of the political polarisation of the European Union on recent developments in labour market structure. The labour market is undergoing changes that stem from technological progress as well as outsourcing of low-skill activities, which are causing an increase in labour market and wage polarisation. The premise is that the depopulation of the middle class is increasing political polarisation. The hypothesis is tested on a sample of 27 European Union countries from 1990 to the present using OLS with fixed effects regression analysis. Political polarization is represented by an own constructed political polarization index based on the ideological division of political parties’ data of the ParlGov project (2022). The index is constructed by combining the election results and four ideological spectrums. In conclusion, the dependence of political polarisation on labour market polarisation and wage polarisation is rejected.

Artificial Intelligence and Inequality: Challenges and Opportunities

Integrating artificial intelligence (AI) technologies into various aspects of society has sparked both excitement and concern regarding its potential impact on inequality. This abstract provides an overview of the key issues surrounding AI and inequality, exploring the challenges and opportunities arising from the widespread adoption of AI systems. Firstly, we examine how AI technologies have the potential to exacerbate existing inequalities across various domains, including labor markets, education, healthcare, and access to services. AI-driven automation may lead to job displacement and wage polarization, widening the gap between high-skilled and low-skilled workers. Moreover, algorithmic biases embedded in AI systems can perpetuate discrimination and inequity, particularly against marginalized communities. However, alongside these challenges, AI also presents opportunities to address inequality and promote inclusivity. AI-powered innovations have the potential to enhance efficiency, accessibility, and affordability in sectors such as healthcare, education, and financial services, thereby reducing disparities in access to essential resources and opportunities. Additionally, initiatives focused on ethical AI development and responsible AI governance can mitigate the negative impacts of AI on inequality by promoting fairness, transparency, and accountability in algorithmic decision-making processes. In conclusion, while AI has the potential to both exacerbate and mitigate inequality, its ultimate impact depends on the choices we make in designing, deploying, and governing AI systems. By prioritizing equity, social justice, and human welfare in AI development and implementation, we can harness the transformative power of AI to create a more equitable and inclusive society.

Routine and non-routine sectors, tasks automation and wage polarization

ABSTRACTRecent and detailed data point to a polarization of wages with regard to the distribution of skills, particularly in developed countries over the past three decades, requiring the literature to address modelling approaches focused on automating different types of tasks. In the DTC literature, the technological-knowledge bias leads to an increase in the wage of skilled workers relative to unskilled workers. Motivated by this literature, this paper considers three types of workers (skilled, medium-skilled and unskilled) but retain the economic mechanisms that produce the results. Thus, wage inequality continues to result from the technological-knowledge bias, which, in the face of automation dynamics, reveals that medium-skilled workers are the relatively most penalized, generating wage polarization. Furthermore, as in the directed technical change literature, the relative supply of skilled workers continues to affect the skill premium.

The race between offshoring and automation in explaining wage polarization

AbstractOffshoring and automation are sources of wage polarization. We reassess these two determinants of wage polarization in a single directed technical change setup that encompasses routine and nonroutine production. We empirically establish the conditional positive relationship between automation and relocations on one side and wage polarization on the other. Theoretically, we show that wage polarization increases with automation and offshoring. In particular, wage polarization in favor of domestic (nonroutine) high(low)-skilled workers is positively affected by an increase in domestic (nonroutine) high(low)-skilled labor quantity and/or absolute productivity. Additionally, it is also positively influenced by a rise in foreign (routine) medium-skilled labor quantity and/or absolute productivity while negatively impacted by an increase in domestic (routine) medium-skilled labor quantity and/or absolute productivity. We show that the effect of offshoring on wage polarization diminishes with the degree of substitutability between routine and nonroutine sectors in the economy, with the share of machines in the production of intermediate goods, and with the scale effect. We quantitatively assess the impact through a thorough data-based calibration exercise, where the numerical results confirmed the theoretical findings.

Technological knowledge and wages: from skill premium to wage polarization

This paper studies the impact of automation shocks on the technological-knowledge level, skill premium (or wage inequality), real prices, output, and economic growth. To highlight the economic mechanisms, we devise a task-based direct technical change model that allows us to analyze the determinants of the threshold task, the relative output and prices between sectors, intra- and inter-sectoral wage differences, wage polarization and economic growth rates. We observe that an increase in the efficiency of skilled or unskilled workers as well as a decrease in the efficiency of medium-skilled workers as possible result of automation always increase wage polarization as well as economic growth rates. In a quantitative exercise we also assess the change in the weight of routine and non-routine sectors in the economy. In this context, governments should implement policies to support the professional transition of medium-skilled workers to non-routinazable tasks.

Inflation, technological-knowledge bias, and wages

A detailed examination of wage data points to a wage polarization trend vis-à-vis the distribution of qualifications. Theoretically terms, this points to the need for modeling focused on the relevance of the direction of technological knowledge. To this end, we branched production into routine and non-routine tasks. In this way, the results produced positive relationships between the relative supply of skilled workers and the skill premium and between automation and wage polarization.

Does Skill Polarization Affect Wage Polarization? U.S. Evidence 2009–2021

(1) Background: Wage polarization and skill polarization are frequently mentioned in the literature, but relatively few empirical studies have focused on the relationship between skill polarization and wage polarization. (2) Methods: Using occupation–skill data from the O*NET database in the United States from 2009 to 2021, this study constructs the occupational socio-cognitive skill scores and the number of perceived physical skills effectively used by an occupation as proxies for measuring skill polarization and matches the Occupational Employment and Wage Statistics data from the corresponding years to explore the relationship between skill polarization and wage polarization by using 2SLS. (3) Results: Increases in both the occupational socio-cognitive skills scores and the number of sensory–physical skills effectively used by an occupation lead to higher wages, but the magnitude of the positive effects of these two indicators are different. We also find that these control variables can reduce occupational wages with a lagged effect. (4) Conclusion: Our findings confirm that skills polarization has a positive effect on wage polarization, providing new insights into understanding employment inequality in the labor market. Authorities should focus more attention on increasing the earnings of the low- and middle-skilled workers, especially through vocational skills training to increase the number of sensory–physical skills that can ultimately mitigate wage polarization.

Routine-biased technological change and wage inequality: do workers’ perceptions matter?

The Routine-Biased Technological Change (RBTC) has been regarded as a relatively novel technology-based explanation of social changes affecting job and wage polarization. In this paper, we investigate wage inequality between routine and non-routine workers along the wage distribution in Italy. Thanks to unique survey data, we can estimate the wage differential using both the actual and the perceived level of routine intensity of jobs to classify workers. We adopt semi-parametric decomposition techniques to quantify the importance of worker characteristics in explaining the gaps. We also employ non-parametric techniques to account for self-selection bias. We find evidence of a significant U-shaped pattern in the wage gap, according to both definitions, with non-routine workers always earning significantly more than routine workers. Results show that worker characteristics fully explain the gap in the case of perceived routine, while they account for no more than 50% of the gap across the distribution in the case of actual routine. Thus, the results highlight the importance of taking into account workers’ perceptions to reduce the set of omitted vaiables when analyzing determinants of wage inequality.

Wage Polarization in the Context of the Czech Republic

Abstract Existing studies have provided evidence of job polarization in many developed countries. The issue of wage polarization is less obvious: many articles do not address it at all, and some even confuse it with job polarization. At the same time, the significance of the phenomenon of polarization results precisely from the consequence of wage polarization: the increase in wage inequality. The aim of this article is to find out whether wage polarization occurred in the Czech Republic during the period 2004–2018. Wage development in the private sphere does not imply wage polarization, but in the public sphere, results imply a very slight wage polarization mainly due to the development between 2004 and 2010. This phenomenon has occurred in both male and female occupations. Panel regression analysis shows that globalization reduces upper-tail inequality (the ratio Q90/Q50) while increasing lower-tail inequality (the ratio Q50/Q10). At the level of the whole economy, technology seems to contribute to reducing both upper-tail and lower-tail inequality. These results probably correspond to the nature of the Czech economy, which is based on middle-skilled workers with a pro-export focus.

Trade, Labor Reallocation Across Firms and Wage Inequality

This paper develops a framework for studying the effects of higher trade openness on the wage distribution that emphasizes within-industry labor reallocation across firms, strong skill-productivity complementarities in production and heterogenous fixed export costs across firms. Assuming no entry in the industry, an autarkic economy that opens to trade experiences a pervasive rise in wage inequality; a trade liberalization in a trading economy increases inequality at the lower end of the distribution, but may reduce it elsewhere. Assuming free entry, opening to trade could result in pervasively higher inequality or wage polarization. The analysis highlights the importance of new exporters (extensive margin) in shaping the aggregate relative demand for skills, a channel controlled by the distribution of fixed export costs in the model.

The relative impact of different forces of globalization on wage inequality: A fresh look at the EU experience

AbstractThis paper analyzes in a joint approach the contributions of immigration, trade, and foreign direct investment (FDI) to wage inequality of native workers in a sample of old and new EU Member States between 2008 and 2013. Methodologically, we use the two‐step regression‐based Shapley value decomposition approach to filter out their relative importance in each of the countries analyzed. We find that globalization has very mixed effects and generally contributes little to wage inequality. Regarding their relative contributions, immigration and FDI are key contributors to wage inequality in old EU Member States while trade is the key source of wage inequality in new EU Member States. For immigration, the associated increase in wage inequality is strongest and most consistent among Southern EU Member States. We also show that immigration, trade, and FDI have different effects across the wage distribution that are however strongest at its center, which points to the relatively strong wage polarization effect of globalization. For trade and FDI, we also find sporadic inequality‐reducing effects that are strongest at the top of the wage distribution.

Offshoring, computerization, labor market polarization and top income inequality

This paper proposes a model of occupational choice with heterogeneous agents in terms of human capital to quantify the role of offshoring and computerization in labor market polarization and increased top income inequality. We find that both offshoring and computerization played a major role regarding labor market polarization in the US over the period 1975–2008. We further show that the last decades can be decomposed into two subperiods. Computerization is the main driver of labor market polarization from 1975 to the mid 1990s, after which globalization (through decreased costs of offshoring) explains more than 70% of job and wage polarization. Our model can also explain around 40% of the observed increase in top income inequality since 1975.

Skill-biased technological change and labor market polarization in China

This paper analyzes the formation mechanism of polarization in China’s labor market from the perspective of skill-biased technological change (SBTC). Using the World Input–Output Database for 1995–2009 and China’s industry database for 2010–2016, this paper measures the SBTC of 33 industries in China and conducts empirical tests. Results show that SBTC significantly promotes growth in employment and wages among both high-skilled and low-skilled workers but has no significant impact on the employment and wages of medium-skilled workers. A further analysis by using quantile regression shows that SBTC inhibits employment and wage growth among medium-skilled workers to some extent. These results indicate that SBTC is a crucial source of employment and wage polarization and contributes to labor market polarization in China.

Moving Beyond Lewis: Employment and Wage Trends in China\u2019s High- and Low-Skilled Industries and the Emergence of an Era of Polarization

One of the defining features of China’s economy over the two decades between 1995 and 2015 was the persistent rise of wages for workers and professionals in nearly every segment of the economy—with wage rates for labor-intensive jobs in manufacturing, construction, and the informal service sector rising the fastest. Recently, however, the economic environment in China has begun to change, including changes in both employment and wages. We identify recent employment/wage trends throughout China’s economy and postulate the sources of these trends as well as possible future consequences if they continue. We use official, nationally aggregated data to examine employment and wages in multiple sectors and industries. Our findings indicate that China may have entered a new phase of economic development in the mid-2010s. According to the data, in recent years, wage growth has begun to polarize: Rising for professionals employed in formal skill-intensive industries; and falling for workers in the informal labor-intensive service sector. We attribute this increase in skill-intensive wages to an increase in demand for skill-intensive employment, due to the emergence of a large middle class in China, for whom the demand for high technology, finance, banking, health, and higher education industries is increasing while, at least in the recent short term, the supply of experienced, high-skilled professionals has not kept up. The employment/wage trend in the informal (low-wage) service sector, however, is following a different pattern. While there is a rising demand for services in China’s economy, the growth, due to a number of factors (e.g., large shares of GDP targeted by policymakers to investment; high rates of savings by consumers), is relatively slow. In contrast, due to a number of economic forces, including globalization and automation, the supply of labor into the service sector of the informal economy is being fueled by the flow of labor out of manufacturing and construction (two industries that that have experienced employment declines since 2013). These supply and demand trends, in turn, are leading to the fall in the growth rate of wages in the informal service sector. We conclude by discussing the possible longer-term consequences of these emerging polarization trends based on an examination of recent experience with wage polarization occurring in both middle- and high-income countries, as well as its consequences. We also present policy recommendations for greater investment in education and human capital, as well as for the development of a more comprehensive set of social safety nets for different segments of China’s population.

Computerization and immigration: Theory and evidence from the United States

AbstractRecent technological changes have been characterized as “routine‐substituting” because they reduce demand for routine tasks and increase demand for analytical and service tasks. Little is known about how these changes have impacted immigration, or task specialization between immigrants and native‐born individuals. In this paper, we show that such technological progress has attracted immigrants who increasingly specialize in manual‐service occupations. We also suggest that openness to immigration attenuated the job and wage polarization faced by native‐born from technological changes. We explain these facts with a model of technological progress and endogenous immigration. Simulations show that unskilled immigration attenuates the drop in routine employment proceeding from technological change, enhances skill upgrading for native‐born and raises economy‐wide productivity and welfare.

Employment incentives and the disaggregated impact on the economy. The Italian case

Over the past two decades, the Italian labour market has undergone a number of profound changes. A thorough analysis of these changes shows that there has been a progressive employment polarisation, although with a very peculiar dynamics. While employment did grow in high-skill and low-skill occupations, and it shrank in the medium-skill ones, these changes did not take place simultaneously, as polarisation assumes. Moreover, wage polarisation is hardly observable in the same period. Quite differently, Italy has been characterised by relatively low or even declining returns to education along with progressively decreasing wages in the low-skill segment of the labour market. In this context, we study the potential of an employment incentive policy, for which we imagine two options, one targeting workers in high-skill and the other in low-skill occupations. The objectives of the policy are enhancing aggregate employment and improving working conditions (wages) either in high-skill or low-skill occupations, depending of the option. For the simulation of the two policy options, we employ an integrated model that combines a macro disaggregated and multi-sectoral Computable General Equilibrium (CGE) model with a micro-simulation model. While the CGE model evaluates how the macroeconomic shock reverberates on the labour demand at industry level, the micro-simulation model computes how the changes in macroeconomic variables affect households’ decisions in terms of labour supply and final consumption.

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

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.

The Impact of the Crisis on the Polarization of Spanish Wages

This paper evaluates the impact of the economic downturn on Spanish wage polarization. Using the index of polarization of Palacios-González and García-Fernández (2012), we have computed polarization structuring the earners population into groups according to their wages, gender, education, branch of activity, job status and type of contract. Our results show an increase of wage polarization in all the considered categories except for the type of contract and the branch of activity. This increase in polarization is resulting in social tensions and it must be taken into consideration by policy-makers in the economic and social fields.