Multidimensional Heterogeneity and Matching in a Frictional Labor Market – An Application to Polarization

The role of technological change in labor market polarization is a debated issue and has been subject to recent critique. This paper finds that RBTC can account for wage and job polarization in the US from the 1980s to the 2010s. It also demonstrates that RBTC is consistent with the timing of labor market polarization in the US, including the stagnation of the 50/10 wage percentile ratio and the slowdown of employment growth in high-wage jobs from the 2000s. The paper does so using a model with two key ingredients: 1) directed search and 2) two-sided multidimensional heterogeneity. Estimation results show that the complementarity between cognitive skill and task increased while that between manual skill and task did not. The model can fully account for the rise and fall of the 90/50 and 50/10 wage percentile ratios respectively. It also generates 72.6 percent of the rise in employment share of high-paying jobs relative to middling jobs and 69 percent of the fall in employment share of middling jobs relative to low-paying jobs. The paper suggests that the stagnation of the 50/10 wage ratio may be due to rank-switching between workers across the wage distribution from the 2000s, while the slowdown of employment growth in high-wage jobs may result from the tradeoff between the returns to applying for high-wage jobs and the likelihood of unemployment