Results for Basic Counterfactual Analysis

In this sub-section I discuss results for the basic counterfactual analysis. I focus on male and younger female workers, as these have been shown to be most important for job polarization. Results for male workers and young female workers are shown in tables 2.4 to 2.7. Results for prime aged and older women are shown in the appendix in tables A.5 and A.6.

Each table reports results for counterfactual transition rates for a specific de- mographic group. Also shown in the table are benchmark propensity changes for the group’s respective employment shares. Each panel in the table presents results for a particular employment share, and results are presented separately for each period. The counterfactual transition rate associated with the respective result is shown in column one, which indicates the state out of which transitions are considered, and columns two to thirteen, showing destination states separately for each period. Note that non-employment outflow rates corrected for compositional changes, reflecting the sample start problems discussed above, are denoted as ‘non (cr)’. Results are presented as the contribution to the benchmark propensity change in percentage points.43 For instance, looking at the first panel for low skilled employment of table 2.4, the first column for period 1981 to 1990 in the first row of results shows that the counterfactual transition rate from medium to low skilled employment contributes 1.3 pp to the rise in low skilled employment share of 2.3 pp. Equivalently, results in the second row of the same column show that the change in the transition rate from medium to low skilled employment counteracts the increase by 0.4 pp.

The reasoning of the counterfactual analysis implies that transition rate

42

These larger discrepancies likely reflect comparatively large jumps in annual transition rates directly at the end of the previous expansionary period. These changes are not due to any known discontinuity.

43

Note that a positive contribution to a negative benchmark change implies that the transition rate change can account for (part of) that change, whereas a negative contribution to a negative benchmark implies the transition rate change counteracts the benchmark change.

changes are important for job polarization if they have a large contribution to the observed shifts in the employment distribution. As the defining feature of polariza- tion is the decline in medium skilled employment, I focus on transition rate changes contributing importantly to this decline.

Young Male Workers

The decomposition conducted above shows that young male workers shifted from medium and high skilled jobs to low skilled employment. The benchmark scenario implies a decline of almost 18 pp in medium skilled employment share over the period 1981 to 2015, accompanied by a 2.5 pp decline in high skilled employment. Both shifts acted to raise the employment share of low skilled jobs by 20.4 pp.

How are these shifts in the distribution brought about? Table 2.4 shows results for the counterfactual analysis for young male workers.

Young male workers largely shifted from high and medium skilled to low skilled jobs directly at the beginning of their working career. The rise in the transi- tion rates from sample entry to low skilled jobs, and simultaneous decline in entry rates to medium skilled jobs, shown in figure A.8, can account for 10.5 and 9.2 pp of the decline in medium skilled employment.44 The rise in low skilled employment is additionally fuelled by lower entry rates to high skilled jobs. This rate can account for the entire decline in the high skilled employment share.

This implies that a large part of the decline in medium skilled employment reflects male workers experiencing a worsening of their employment outlook right from the beginning, as they more often started their career in low skilled rather than medium skilled jobs. As these results are unconditional on education, it stands to reason whether this rise falls disproportionately on workers with low education.

Overall, table 2.4 suggests only a limited contribution of reallocation between employment types to the observed shifts. It appears that distributional shifts are not associated with young male workers moving from one job type to another.

There is no evidence that workers reallocate to low or high skilled jobs directly out of medium skilled employment. This also implies that the surge in workers starting their career in a low skilled job is not accompanied by a rising reallocation from low to medium skilled jobs. The respective transition rate contributes 1.4 pp to the shift from medium to low skilled employment. Qualitatively similar results apply for reallocation from low to high skilled jobs. The counterfactual analysis

44

Recall that counterfactual transition rates require adjusting other transition rates to assure that the sum of rates from sample entry is one. Counterfactual sample entry rates for young workers are adjusted by adding the difference between the benchmark and counterfactual entry rate proportionally to entry rates to other employment types and non-employment.

implies that such transitions do not affect distributional shifts. Addressing the question whether young workers entering in a low skilled job in fact remained in low skilled employment permanently cannot be answered by this analysis, as this requires following workers over longer periods. Examining this question in future research, however, is important for assessing the impact of job polarization on young workers. While there is no evidence of workers being more likely to reallocate directly from medium skilled jobs to low or high skilled ones, there is a smaller impact on distributional changes due to the fact that they are less likely to reallocate out of low or high employment towards medium skilled jobs. These rates contribute 2.1 pp to the shift from medium to low skilled employment, and they imply a shift of 0.8 pp from medium to high skilled jobs.

Is there any evidence that job polarization is driven by job destruction? That is, are young workers experiencing job polarization because they are more likely to loose their medium skilled job? The counterfactual analysis only suggests a minor impact for the transition rate from medium skilled jobs to non-employment. It contributes 1.8 pp to the decline in medium skilled employment. As this reduces the stock of workers holding a medium skilled job while affecting workers in low and high skilled jobs only indirectly, this acts to raise employment shares for low and high skilled jobs somewhat.

The decline in the non-employment outflow rates exhibit more substantial contributions.45 Examining the contribution of corrected and uncorrected non- employment outflow rates suggests a sizable impact on job polarization due to changes in non-employment outflow rates to low and medium skilled jobs. This is consistent with a decline in job creation for medium skilled jobs. It appears that young male workers shifted from medium to low skilled jobs partly because they are more likely to leave non-employment to a low rather than a medium skilled job. The contribution for the decline in medium skilled employment ranges from 3 to 7.8 pp of the 17.9 pp decline. The question arises whether this reflects workers returning to their previous employment type, or workers settling for low skilled employment after being unable to find a better job. I will address this question below by conducting the counterfactual analysis conditional on previous employment.

The main features are fairly constant over time. The most important con- tribution stems from direct entry to low rather medium or high skilled jobs over all

45

Recall that the drop in observed outflow rates from period 1 to period 3 is likely to be up- ward biased because of compositional changes reflecting either worker heterogeneity or duration dependence. I therefore also use transition rates corrected for compositional changes, for which the decline is entirely driven by changes in duration-specific exit rates. The contribution of non- corrected outflow rates is likely to be overstated, while I take the contribution of corrected outflow rates as a lower bound.

periods. The contribution of non-employment outflow rates is also consistent across periods. The outflow rate to low skilled jobs rises drastically after the Great Reces- sion, and this is reflected in a large rise in the contribution for the overall period relative to the period ending in 2008. Reallocation from medium skilled employment appears relatively unimportant throughout, but the contribution due to the down- grading of workers moving from medium to low skilled jobs is a recent phenomenon. In line with transition rate changes shown in A.5, it contributes little to, or even counteracts, the decline in medium skilled jobs until the most recent period.

Prime Aged Male Workers

In line with decomposition results, benchmark changes in employment share demon- strate a shift from medium to low and mostly high skilled jobs. The benchmark decline in medium skilled employment is 11.5 pp, while the rise in low and high skilled shares is 4.4 and 7.0 pp respectively.

Results for the counterfactual analysis, shown in table 2.5, suggest that overall these shifts largley result from workers being less likely to hold a medium skilled job and more likely to be non-employed as they spend longer time in non- employment. Together with changes occuring in earlier age groups this change can also account for the rise in low and high skilled employment.

Transitions between employment are again of minor importance. As for young male workers, there is no evidence for job polarization reflecting workers moving from medium directly to low or high skilled jobs. Instead, a decrease in the reallocation from other jobs to medium skilled jobs contributes modestly. This appears to be more important for workers transitioning from high skilled jobs. The raste from low and high skilled to medium skilled employment contribute 0.8 and 2.9 pp respectively to the decline in medium skilled jobs.

Job destruction does not play a visible role in the disappearance of medium skilled jobs. The transition rate from medium skilled employment to non-employment exhibits a small and negative contribution. The decline is associated with decreas- ing outflow rates to medium skilled jobs, however, suggesting a role for job creation. The contribution of this outflow rate ranges from 8.5 to 16.1 pp of the 11.5 pp de- cline. Even when considering the corrected rate, the drop in this rate can account for almost the entire decline in the medium skilled employment share. This also sug- gests that some of the rise in low and high skilled employment is purely mechanical: their share rises as the absolute number of workers in medium skilled jobs declines. Note that these results apply to changes experienced by male workers while they belong to the group of prime aged workers. Transition rate changes may have

additional effects as they affect the labour market states of young workers at the time they enter the prime aged group. The combined effects will be captured by entry rates for subsequent age groups, of course. Entry plays only a modest role. It can contribute 2.1 pp to the decline in medium skilled jobs, but 1.7 pp, a relatively large share, to the rise in low skilled employment.46 This is consistent with the large shifts of young workers towards low skilled employment.

The main features of this pattern also obtain for earlier periods. The decline in medium skilled employment shares is generally accounted for by the decline in probability to exit non-employment by entering a medium skilled job. Also, the decline in transition rates from low and high skilled employment to medium skilled jobs leads to similar results across periods, and non-employment inflow rates are generally unimportant for polarization. There is some additional evidence that medium skilled workers are less likely to upgrade to high skilled jobs in the first two periods, and that this contributes to the modest decline in the high skilled employment propensity.

Older Male Workers

Older male workers experience distributional shifts from medium to low and high skilled jobs, with shifts to high skilled jobs being most important. Over the pe- riod from 1981 to 2015, benchmark changes demonstrate a decline in the medium skilled employment share of 11 pp, and increasing shares for low and high skilled employment of 1.8 and 9.2 pp.

Results for the counterfactual analysis are shown in table 2.6. Overall, results suggest the pattern of transition rate change contributions is similar to prime aged male workers. The shift from medium skilled jobs to non-employment largely results because workers, instead of taking on employment in medium skilled jobs, remain longer in non-employment.

The transition rate from non-employment to medium skilled jobs can account for 9.2 to 18.2 pp of the 11 pp decline in medium skilled employment share. There is no evidence that medium skilled employment declines because workers are more likely to loose their medium skilled job. The non-employment inflow rate from

46_{Recall that the contribution of entry transition rates indicates the combined effect of transition}

rate changes affecting workers before they enter subsequent age groups. Entry rates are held constant at their levels in period 3. Results for the counterfactual are only available for periods ending in 2008 or 2015. Restricting the direct effects of transition rate changes to each demographic group results from the decision to conduct the analysis at the demographic group level. The advantage of distinguishing effects by group is met by the disadvantage of being unable to identify cumulative effects. As an additional analysis I therefore conduct below the counterfactual analysis on the full sample.

medium skilled jobs in fact counteracts the decline by 2.4 pp.

Again, job reallocation between employment types is only of minor impor- tance. There is no evidence that polarization reflects workers leaving medium for low or high skilled jobs. Instead, diminishing reallocation towards medium skilled jobs contributes a modest amount. Changes in transition rates from low or high to medium skilled employment account for 0.7 and 2.4 pp of the 11 pp decline.

The contribution from entry is larger than for younger age groups. This is to be expected as entry reflects the cumulative effect of transition rate changes on workers at younger ages. It can account for 3.7 pp of the decline in medium skilled employment, and some sizeable parts of the rise in low and high skilled employment. On the other hand, this means that counterfactual results suggest that older workers experience most of the propensity changes towards the end of their career.

These main features hold throughout the sample period. Earlier periods exhibit some additional patterns, however, affecting largely changes in low skilled employment shares. The decrease in the propensity for low skilled jobs over the period ending in 1990 is, to a limited extent, due to workers being less likely to move from a medium skilled job to a low skilled one. However, the effect for the overall period is small, as this pattern is partly reversed in the most recent period, when this probability increases. In any case, the effect of this change is small in every period.

Young Female Workers

Young female workers experience a shift from medium mostly towards low skilled employment. Their share of high skilled employment remains almost unchanged. The corresponding benchmark changes show a decline of 19 pp in the employment share for medium skilled jobs, a rise in the low skilled employment share of 18.7 pp, and a very small increase in the high skilled employment share of 0.3 pp.

Results are similar to young male workers. The rise in low skilled employment for the most part reflects young female workers entering the labour market directly in a low skilled rather than a medium skilled job. The corresponding transition rate changes can account for 9.4 or 9.6 pp of the decline in medium skilled employment, and 8.6 pp of the rise in low skilled employment. The contribution of the rising entry rate to low skilled jobs additionally reflects the fact that young women are also less likely to enter in a high skilled job. This rate accounts for 11.7 pp of the 18.7 pp rise in low skilled employment share.

Does reallocation between job types play an important role for young female workers? Young women are more likely to move to low or high skilled jobs directly

from medium skilled employment, but this only adds 0.7 and 0.4 pp respectively to the decline in medium skilled employment, and similar amounts to the rise in low and high skilled employment shares. Similar contributions also arise from di- minished reallocation from other job types into medium skilled jobs. Overall, direct reallocation across job types does not seem to be important for the distributional shifts experienced by young women.

Young women differ from all other groups experiencing large declines in medium skilled employment in one important regard: their shift from medium skilled jobs does not reflect reallocation towards non-employment. Non-employment out- flow rates to medium skilled jobs in fact counteract the decline by 2pp, when consid- ering corrected rates. Uncorrected rates suggest a modest contribution of 4 pp, but, given the likely sample start problems, evidence is not conclusive for a substantial contribution. Outflow rates instead contribute to the rise in low and high skilled jobs. Respective contributions are 2.4 to 5.3 and 0.8 to 2.7 pp. Neither are young women more likely to be non-employed because of an increase in job destruction. Non-employment inflow rates from medium skilled jobs again counteract the decline in medium skilled jobs by 2.1 pp, and, more generally, inflow rates from low and high skilled jobs also contribute to the rise in the respective employment shares.

These main features are again largely consistent across periods. The non- employment outflow rate to medium skilled jobs never contributes substantially to the decline in medium skilled jobs. Most shifts can be accounted for by entry to low rather than medium skilled jobs.

Women shift away from medium skilled jobs not because they are less likely to work. In fact, counterfactual results suggest young women reallocate to low skilled jobs instead, and to lesser extent to high skilled jobs, as they directly enter into low skilled jobs, and leave non-employment more quickly to low and high skilled jobs and even to medium skilled jobs.

Prime Aged and Older Female Workers

Results for women are shown in the appendix in tables A.5 and A.6. As these work- ers groups only exhibit minor contributions to employment share changes over the period 1981 to 2015, I only comment on major deviations from previously observed patterns. Recall, however, that these groups become more important in recent years.