Horizontal and Vertical Polarization: Task-Specific Technological Change in a Multi-Sector Economy∗

We develop a novel framework that integrates an economy’s skill distribution with its occupational and industrial structure. Individuals become a manager or a worker based on their managerial vs. worker skills, and workers further sort into different occupations ranked by skill content. Our theory dictates that faster technological progress for middle-skill worker tasks not only raises the employment shares and relative wages of lowerand higher-skill worker occupations (horizontal polarization), but also raises those of managers over workers as a whole (vertical polarization). Both dimensions of polarization are faster within sectors that depend more on middle-skill tasks and less on managerial tasks. The TFP of such sectors grows faster endogenously, and, with complementarity across sectoral goods, their employment and value-added shares decrease (structural change). Our quantitative analysis shows the importance of task-specific technological progress—especially for middle-skill tasks—for understanding changes in the sectoral, occupational, and organizational structure of the U.S. economy since 1980. Technological progress was fastest for occupations that embody routine-manual tasks but not interpersonal skills. Finally, in the limiting growth path, middle-skill occupations vanish but all sectors coexist. ∗Previously circulated as “Managing a Polarized Structural Change.” †University of Mannheim and Toulouse School of Economics: [email protected]. ‡Washington University and Federal Reserve Bank of St. Louis: [email protected].