Federico S. Mandelman and Andrei Zlate

Working Paper 2014-28
December 2014

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During the last three decades, jobs in the middle of the skill distribution disappeared, and employment expanded for high- and low-skill occupations. Real wages did not follow the same pattern. Although earnings for the high-skill occupations increased robustly, wages for both low- and middle-skill workers remained subdued. We attribute this outcome to the rise in offshoring and low-skilled immigration, and we develop a three-country stochastic growth model to rationalize this outcome. In the model, the increase in offshoring negatively affects the middle-skill occupations but benefits the high-skill ones, which in turn boosts aggregate productivity. As the income of high-skill occupations rises, so does the demand for services provided by low-skill workers. However, low-skill wages remain depressed as a result of the surge in unskilled immigration. Native workers react to immigration by upgrading the skill content of their labor tasks as they invest in training.

JEL classification: F16, F41

Key words: labor market polarization, task upgrading, offshoring, labor migration, heterogeneous agents, international business cycles

Fernando Rios-Avila provided superb research assistantship. 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 NE, Atlanta, GA 30309-4470, 404-498-8785, federico.mandelman@atl.frb.org; or Andrei Zlate, Supervision, Regulation and Credit Department, Federal Reserve Bank of Boston, 600 Atlantic Avenue, Boston, MA 02210-2204, 617-973-6383, andrei.zlate@bos.frb.org.
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