How Does Growth in the U.S. Service Sector Impact Labor Polarization?

Discussion Paper

David Autor and David Dorn

June 2011

In a recent study of U.S. employment and wage polarization between 1980 and 2005, David Autor and David Dorn uncover rapid growth of employment and wages in service occupations and investigate how this phenomenon is related to the interaction between consumer preferences and technological progress.

Employment and real earnings of low skill occupations have largely remained stagnant or declined in the past 25 years.  However, deviating from this trend, both wages and hours worked among non-college workers in service occupations note a considerable increase.  Upon further investigation of the U.S. employment and earnings distributions between 1980 and 2005, rising employment and wages in service occupations account for a substantial share of aggregate polarization and growth of the lower tail.  How can one explain the changing face of low skill, low wage employment?  The study hypothesizes that automation of routine tasks substitutes for low skill workers in these positions, and as the price of computer technology has declined and driven down the wage paid for routine tasks, low skill workers have reallocated their labor supply to service occupations, which are difficult to automate.  Given that consumer preferences do not allow close substitutes for service outputs such as restaurant meals and house cleaning, technological substitutes in non-service, low skill tasks potentially raises aggregate demand for service outputs, thus inducing rising employment and wages in service occupations.   Motivated by this framework, Autor and Dorn extend the model, and derive and test the following implications:  (1) greater adoption of information technology; (2) greater reallocation of low skill workers into service occupations (employment polarization); (3) larger increases in both employment and wages at both ends of the occupational skill distribution (wage polarization); (4) and larger inflows of both high and low skill labor.