Is the hollowing out of middle-skill jobs an unavoidable consequence of technological advancement?

In a growing number of countries employment is becoming increasingly polarized: concentrated in the highest- and lowest-paying occupations with a hollowing out of middle-skilled jobs. Alongside this polarisation, we are encountering a worrying growth of income inequalities.

Article | 23 April 2015
The share of low-skilled non-routine manual jobs has declined at the global level, while the share of high-skilled non-routine cognitive jobs has increased. The incidence of traditional occupations (such as shoemaker, blacksmith and carpenter) has been gradually declining in developed economies, while new occupations such as software engineer, business consultant and product marketing manager are emerging. Importantly, medium-skilled routine jobs have slowly but steadily been disappearing over the recent years.

These occupational changes have not only shaped employment patterns, but they may have also contributed to the widening of income inequality recorded over the past couple of decades. Earnings data for developed economies illustrate that non-routine cognitive jobs pay considerably higher wages, on average, than routine and non-routine manual occupations. An increase in the number of jobs at both the lower and upper ends of the skills ladder at the expense of medium-skilled routine jobs hence contributes to a rise in income inequality.

The declining prominence of middle-skilled jobs is largely driven by an increase in the automation of routine tasks and, to a certain degree, the outsourcing of jobs. Technological progress is often cited as the main cause of the hollowing-out of medium-skilled jobs in developed countries. New technologies – such as information and communication technologies (ICT) – have been replacing routine tasks which are repetitive tasks characteristic of many medium-skilled cognitive and production activities such as bookkeeping and clerical work.

New technologies have raised relative demand for non-routine tasks that depend on high skill levels, such as lawyers, and manual tasks that require little in the way of formal education, such as janitors and security personnel.

Countries that are quickly upgrading ICT – such as Finland, the Netherlands, the United Kingdom and the United States – also saw the most rapid increase in high-skilled workers and the replacement of medium-skilled jobs. However, this rapid technological progress does not necessarily reduce the overall demand for labour. It simply shifts the demand to different types of work, including new occupations that might not have existed before.

Globalization has also been cited as a cause of job polarization to higher and lower skilled occupations, with possible effects on inequality. Freer international trade has raised the relative cost of production in developed economies by eliminating many tariff wedges. Lower labour cost in developing countries and falling transportation costs make overseas production a more favourable option. This has led to offshoring of certain parts of the production process, contributing to changes in the employment structure and to the fall in many medium-skilled manufacturing jobs in advanced economies.

Moreover, this process has led to changing income levels for workers across the occupation and skill spectrum. Although the manufacturing sector has recovered in some advanced economies in the past few years, the jobs that are returning are more often temporary and with lower pay.

Former medium-skilled workers who are able to secure new employment often find themselves earning significantly less than before. Outsourcing also puts direct pressure on the wages of workers in manufacturing, as foreign competition pushes down the price of goods and forces employers to cut cost.

Finally, some of those with higher education attainment and skills enjoy higher earnings for jobs in science, engineering and management, although some college‑educated workers also face wage stagnation in some advanced economies.

In the U.S., women were hit much harder than men by the disappearance of middle-skill jobs. However, the majority of women upgraded their skills and found better paying jobs. More than half of all men who lost their middle-skills jobs settled for lower-paying occupations. This seems to indicate that by increasing one’s skill level through education, opportunities for higher-paid jobs increased.

The difficulty that countries will face over the coming years is a continuing loss of middle-skill, routine jobs which account for a higher percentage of all existing jobs. As technological advances move forward, and more non-routine tasks become routine, the pace of polarization will continue requiring serious and effective policy responses to address these challenges.