Abstract: Employment/wage polarization has been a popular topic in labor theory, given its important implication in equality and wealth distribution of the society. While the literature has focused on the demand side of labor market, the recent empirics require us to look at the supply of labor as well. Particularly, no clear explanation about why college enrollment (supply of skilled labor) is stagnant despite rising college wage premium has been provided. Using the theoretical framework of the sequential job search model, we analyze the optimal skill-upgrading decision of agents which are heterogeneous in skills, and provide a simple calibration to the United States’ wage distribution over 3 decades to show that increasing polarization could hinder people’s decision to upgrade their skills by worsening job prospect for lower-middle skill workers.
Paper can be found here.vu_JPfinal