Explaining Job Polarization: The Role of Heterogeneity in Capital Intensity

We propose a new perspective that job polarization stems from the interaction of the decrease in the relative price of capital goods, the heterogeneity in capital intensity of job task production, and the complementarity of job tasks in final goods production. First, we construct a measure of occupation-level capital intensities and document that the tasks of middle-skill workers tend to be more capital intensive. Second, we build a task-based model with two goods sectors and three job tasks, where the job task production differs in capital intensity and how a worker’s skill is utilized. The model demonstrates that when there is technological progress in investment technology, employment shifts away from capital-intensive tasks, and the relative wages are driven down, implying that a decreasing price of capital goods predicts job polarization. A quantitative analysis suggests that the model can account for approximately one-half of the employment polarization and approximately one-half of the upper tail of the wage polarization in the U.S. between 1980 and 2010.