Labor Market Polarization and International Macroeconomic Dynamics

Federico S. Mandelman
Working Paper 2013-17
December 2013

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During the last thirty years, labor markets in advanced economies were characterized by their remarkable polarization. As job opportunities in middle-skill occupations disappeared, employment opportunities concentrated in the highest- and lowest-wage occupations. I develop a two-country stochastic growth model that incorporates trade in tasks, rather than in goods, and reveal that this setup can replicate the observed polarization in the United States. This polarization was not a steady process: the relative employment share of each skill group fluctuated significantly over short-to-medium horizons. I show that the domestic and international aggregate shocks estimated within this framework can rationalize such employment dynamics while providing a good fit to the macroeconomic data. The model is estimated with employment data for different skills groups and trade-weighted macroeconomic indicators.

JEL classification: F16, F41

Key words: labor market polarization, international business cycles, heterogeneous agents, stochastic growth, two-country models

Fernando Rios-Avila and Jing Yu provided superb research assistance. The author gratefully acknowledges David Dorn for very helpful interactions concerning the data analysis. He also thanks Andrei Zlate, Pedro Silos, and conference and seminar participants at the Society for Economic Dynamics, Midwest Macro, Econometric Society, the Federal Reserve Bank of Philadelphia, University of Georgia, Riksbank, ICEF, Universidad Torcuato Di Tella, Universidad de San Andres, Universidad Catolica, the Universidad de Montevideo, and the central banks of Argentina, Chile, and Uruguay for helpful comments. Part of this work was completed while the author was visiting Universidad Torcuato Di Tella. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Federico S. Mandelman, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8785,

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