The economic consequences of an increasingly polarized job market

Technology, in particular that which enables the automation of production processes, is radically changing the world of work in Europe and globally. However, this trend not only has a direct effect on society and the labour market but also has a crucial impact on the functioning of the economy and the economic policies of governments and central banks.

A study by Daniele Siena, Professor of Macroeconomics at the School of Management (https://www.som.polimi.it/en/) of the Politecnico di Milano, and Riccardo Zago, published on The Economic Journal, shows how the destruction of routine jobs, such as those of craftsmen, factory workers, farmers, plant/machinery operators and unskilled workers, is changing the structure of the economy in the Eurozone. In particular, the polarisation of the labour market towards manual (generally low-income) and abstract (high-income) jobs is making prices in the economy less sensitive to changes in employment.

This happens because the routine labour and the non-routine labour markets work in a very different way from each other. The routine labour market is very rigid and barely dynamic; mobility of workers is low as they due to their poor qualification level, and collective bargaining coverage is high. In contrast, the non-routine labour market is more fluid and dynamic. Indeed, non-routine workers change their employer more often, may have more jobs at the same time and show higher mobility. The result is an aggregate labour market in which it is easier to lose one’s job but also to find a new one, as the technology transition increases the share of non-routine workers.

This leads to more stable wages and therefore increases stability in prices, in response to the economic cycle. Indeed, when an economic shock or a change in economic policies occurs, the economy usually reacts in terms of quantity of labour (employment and unemployment) rather than wages.

To sum up, the labour market transition from routine to non-routine jobs makes wages and inflation less sensitive to changes in the economic cycle at the aggregate level.

Understanding this mechanism is of paramount to understand the effect of European economic policies. In particular, the change in the structure of labour may explain the European Central Bank’s difficulty in controlling inflation in the years before the Covid-19 pandemic. The current reversal of the labour market polarisation caused by Covid-19, implemented through the re-industrialisation plans of Next Generation EU, may explain the unexpected inflationary boost of the expansionary monetary and fiscal policies implemented to mitigate the effects of Covid-19.

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Daniele Siena, Riccardo Zago
Job Polarisation, Labour Market Fluidity and the Flattening of the Phillips Curve
The Economic Journal, January 2024