Fact of the Week: Sectors With High “Income Elasticity” Employ Fewer Medium-Skill Workers, Explaining 60 Percent of the Decline in Their Share of Wages Between 1980 and 2016

Source: Diego Comin, Ana Danieli, and Marti Mestieri, “Demand-Driven Labor-Market Polarization,” 2019 Meeting Papers 1398, Society for Economic Dynamics.

Commentary: The U.S. economy has polarized since 1980, with widening gaps between high- and low-skilled wages driving increased inequality. One study has provided a partial explanation for this trend, identifying that sectors with high “income elasticity” (where demand is more sensitive to changes in income) are more likely to employ both high- and low-skilled workers, but less likely to employ medium-skilled workers. As the economy grows, high-elasticity sectors such as education and health services expand more quickly, creating more jobs than other sectors. The study estimates that differences in sectoral elasticity explain 60 percent of medium-skilled workers’ declining share of wages between 1980 and 2016, and 50 percent of high-skilled workers’ increasing share.