Don't Blame Technology for Wage Inequality

Don’t Blame the Robots: Assessing the Job Polarization Explanation of Growing Wage Inequality

Authors:

Lawrence Mishel, Heidi Shierholz, and John Schmitt

Executive Summary:

Many economists contend that technology is the primary driver of the increase in wage inequality since the late 1970s, as technology-induced job skill requirements have outpaced the growing education levels of the workforce. The influential “skill-biased technological change” (SBTC) explanation claims that technology raises demand for educated workers, thus allowing them to command higher wages—which in turn increases wage inequality. A more recent SBTC explanation focuses on computerization’s role in increasing employment in both higher-wage and lower-wage occupations, resulting in “job polarization.” This paper contends that current SBTC models—such as the education-focused “canonical model” and the more recent “tasks framework” or “job polarization” approach mentioned above—do not adequately account for key wage patterns (namely, rising wage inequality) over the last three decades. Principal findings include:

1. Technological and skill deficiency explanations of wage inequality have failed to explain key wage patterns over the last three decades, including the 2000s.

The early version of the “skill-biased technological change” (SBTC) explanation of wage inequality posited a race between technology and education where education levels failed to keep up with technology-driven increases in skill requirements, resulting in relatively higher wages for more educated groups, which in turn fueled wage inequality (Katz and Murphy 1992; Autor, Katz, and Krueger 1998; and Goldin and Katz 2010). However, the scholars associated with this early, and still widely discussed, explanation highlight that it has failed to explain wage trends in the 1990s and 2000s, particularly the stability of the 50/10 wage gap (the wage gap between low- and middle-wage earners) and the deceleration of the growth of the college wage premium since the early 1990s (Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012). This motivated a new technology-based explanation (formally called the “tasks framework”) focused on computerization’s impact on occupational employment trends and the resulting “job polarization”: the claim that occupational employment grew relatively strongly at the top and bottom of the wage scale but eroded in the middle (Autor, Levy, and Murnane 2003; Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012; Autor 2010). We demonstrate that this newer version—the task framework, or job polarization analysis—fails to explain the key wage patterns in the 1990s it intended to explain, and provides no insights into wage patterns in the 2000s. We conclude that there is no currently available technology-based story that can adequately explain the wage trends of the last three decades.

2. History shows that middle-wage occupations have shrunk and higher-wage occupations have expanded since the 1950s. This has not driven any changed pattern of wage trends.

We demonstrate that key aspects of “job polarization” have been taking place since at least 1950. We label this “occupational upgrading” since it primarily consists of shrinkage in relative employment in middle-wage occupations and a corresponding expansion of employment in higher-wage occupations. Lower-wage occupations have remained a small (less than 15 percent) and relatively stable share of total employment since the 1950s, though they have grown in importance in the 2000s. Occupational upgrading has occurred in decades with both rising and falling wage inequality and in decades with both rising and falling median wages, indicating that occupational employment patterns, by themselves, cannot explain the salient wage trends.

3. Evidence for job polarization is weak.

We use the Current Population Survey to replicate existing findings on job polarization, which are all based on decennial census data. Job polarization is said to exist when there is a U-shaped plot in changes in occupational employment against the initial occupational wage level, indicating employment expansion among high- and low-wage occupations relative to middle-wage occupations. As shown in Figure E (explained later in the paper but introduced here), in important cases, these plots do not take the posited U-shape. More importantly, in all cases the lines traced out fit the data very poorly, obscuring large variations in employment growth across occupational wage levels.

4. There was no occupational job polarization in the 2000s.

In the 2000s, relative employment expanded in lower-wage occupations, but was flat at both the middle and the top of the occupational wage distribution. The lack of overall job polarization in the 2000s is a phenomenon visible in both the analyses of decennial census/American Community Survey data provided by proponents of the tasks framework/job polarization perspective (Autor 2010; Acemoglu and Autor 2012) and in our analysis of the Current Population Survey. Thus, the standard techniques applied to the data for the 2000s do not establish even a prima facie case for the existence of overall job polarization in the most recent decade. This leaves the job polarization story, at best, as an account of wage inequality in the 1990s. It certainly calls into question whether it should be a description of current labor market trends and the basis of current policy decisions.

5. Occupational employment trends do not drive wage patterns or wage inequality.

We demonstrate that the evidence does not support the key causal links between technology-driven changes in tasks and occupational employment patterns and wage inequality that are at the core of the tasks framework and job polarization story. Proponents of job polarization as a determinant of wage polarization have, for the most part, only provided circumstantial evidence: both trends occurred at the same time. The causal story of the tasks framework is that technology (i.e., computerization) drives changes in the demand for tasks (increasing demand at the top and bottom relative to the middle), producing corresponding changes in occupational employment (increasing relative employment in high- and low-wage occupations relative to middle-wage occupations). These changes in occupational employment patterns are said to drive changes in overall wage patterns, raising wages at the top and bottom relative to the middle. However, the intermediate step in this story must be that occupational employment trends change the occupational wage structure, raising relative wages for occupations with expanding employment shares and vice-versa. We demonstrate that there is little or no connection between decadal changes in occupational employment shares and occupational wage growth, and little or no connection between decadal changes in occupational wages and overall wages. Changes within occupations greatly dominate changes across occupations so that the much-focused-on occupational trends, by themselves, provide few insights.

6. Occupations have become less, not more, important determinants of wage patterns.

The tasks framework suggests that differences in returns to occupations are an increasingly important determinant of wage dispersion. Using the CPS, we do not find this to be the case. We find that a large and increasing share of the rise in wage inequality in recent decades (as measured by the increase in the variance of wages) occurred within detailed occupations. Furthermore, using DiNardo, Fortin, and Lemieux’s reweighting procedure, we do not find that occupations consistently explain a rising share of the change in upper tail and lower tail inequality for either men or women.

7. An expanded demand for low-wage service occupations is not a key driver of wage trends.

We are skeptical of the recent efforts of Autor and Dorn (2013) that ask the low-wage “service occupations” to carry much or all of the weight of the tasks framework. First, the small size and the slow, relatively steady growth of the service occupations suggest significant limitations of a technology-driven expansion of service occupations to be able to explain the large and contradictory changes in wage growth at the bottom of the distribution (i.e., between middle and low wages, the 50/10 wage differential), let alone movements at the middle or higher up the wage distribution. The service occupations remain a relatively small share of total employment; in 2007, they accounted for less than 13 percent of total employment, and just over half of employment in the bottom quintile of occupations ranked by wages. Moreover, these occupations have expanded only modestly in recent decades, increasing their employment share by 2.1 percentage points between 1979 and 2007, with most of the gain in the 2000s. Relative employment in all low-wage occupations, taken together, has been stable for the last three decades, representing a 21.1 percent share of total employment in 1979, 19.7 percent in 1999, and 20.0 percent in 2007.

Second, the expansion of service occupation employment has not driven their wage levels and therefore has not driven overall wage patterns. The timing of the most important changes in employment shares and wage levels in the service occupations is not compatible with conventional interpretations of the tasks framework. Essentially all of the wage growth in the service occupations over the last few decades occurred in the second half of the 1990s, when the employment share in these occupations was flat. The observed wage increases preceded almost all of the total growth in service occupations over the 1979–2007 period, which took place in the 2000s, when service occupation wages were falling (another trend that contradicts the overall claim of the explanatory power of service occupation employment trends).

8. Occupational employment trends provide only limited insights into the main dynamics of the labor market, particularly wage trends.

A more general point can and should be drawn from our findings: Occupational employment trends do not, by themselves, provide much of a read into key labor market trends because changes within occupations are dominant. Recent research and journalistic treatment of the labor market has highlighted the pattern of occupational employment growth to assess the extent of structural unemployment, the disproportionate increase in low-wage jobs, and the “coming of robots”—changes in workplace technology and the consequent impact on wage inequality. The recent academic literature on wage inequality has highlighted the role of changes in the occupational distribution of employment as the key factor. In particular, occupational employment trends have become increasingly used as indicators of job skill requirement changes, reflecting the outcome of changes in the nature of jobs and the way we produce goods and services. Our findings indicate, however, that occupational employment trends give only limited insight and leave little imprint on the evolution of the occupational wage structure, and certainly do not drive changes in the overall wage structure. We therefore urge extreme caution in drawing strong conclusions about overall labor market trends based on occupational employment trends by themselves.