Slow Recovery to Nowhere? A Sectoral View of Labor Markets in Advanced Economies

This paper documents the uneven impacts of technological change and trade on labor markets in advanced economies. Over the past 20 years, these trends have lifted living standards in emerging markets and developing economies and everywhere. In advanced economies, technological innovation and the ability to take advantage of a global labor market have contributed to national income. But at the same time, there has been an adverse impact on a large class of workers in advanced economies, particularly in manufacturing, and prospects for this class remain dim. This adverse impact is reflected in increased income inequality. The calculations in this paper also suggest that, at least in the medium term, there could be a dampening effect on potential output growth in advanced economies from the ongoing shift in employment from industries with high productivity growth rates to those with low productivity growth rates. The longer-term solution to the hollowing out of middle-income jobs lie in retraining, better education, and increased productivity in nonmanufacturing sectors. But more immediate action is also needed to cushion some of the human costs of structural change. As Spence (2011) argues, redistribution must be part of the policy response: the and continued support for globalization. Spence cautions that if the employment challenges confronting the advanced economies are not tackled, countries may resort to “protectionist measures on a broad front [and] the global economy will be undermined.”