Tuesday, March 25, 2014

Service Industry Not the Cause of Wage Polarization

Wage polarization is a growing concern among both academics and government officials. Wage polarization is an occurrence where lower skilled workers and higher skilled workers are vastly different in their earning potential. Research by Author and Dorn (2013) discuss the reasons why such polarization is occurring and which industries are raising lower skilled employment opportunities.

The advent of technology is here! Computerization of routine tasks is apparent and those who have not mastered new skills are finding their jobs displaced. The past 25 years have experienced a decline in lower skilled earnings and employment opportunities. The authors indicate that changes are likely to occur across four dimensions:

1.) Greater adoption of information technology;
2.) Reallocation of low-skilled workers from routine tasks to service occupations;
3.) Larger increases in both employment and wages at both the highly skilled and lower skilled labor markets;
4.) Larger inflows into both the high and low skilled labor markets.

The news isn’t all bad for lower skilled labor markets. Service industry workers have an easier time finding employment and higher wages. Between 1980 and 2005 the share of hours worked in the service occupations rose by more than 50%. Real wages also increased 11 log points significantly exceeding every other low skilled industry in the country.

The reason why this phenomenon occurs is because routine tasks are easily replicable by computers while the skills of communication and flexible customer care cannot be easily programmed into strict computer processes. The ambiguous nature of handling customers and their needs requires people who can make decisions on a constantly changing basis.

Who is capitalizing on new technology? Higher skilled and educated workers can use computers to complement their creative, abstract, problem-solving, and coordination skills. This is raising their productive power in society and naturally raising their compensation. A greater divide between the lower skilled displaced worker and the higher skilled worker is apparent.

The service industry is helping employ a greater proportion of displaced workers. It will be necessary to train low skilled workers to find value on the market and raise their market earning potential. Some will be able to move into the service industry while others will need to move into training programs. Those that do neither are more likely to enter the chronically unemployed market.

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