System Working Paper 17-10

Wage Shocks and the Technological Substitution of Low-Wage Jobs

Daniel Aaronson | Federal Reserve Bank of Chicago
Brian J. Phelan | DePaul University

Published June 9, 2017

We extend the task-based empirical framework used in the job polarization literature to analyze the susceptibility of low-wage employment to technological substitution. We find that increases in the cost of low-wage labor, via minimum wage hikes, lead to relative employment declines at cognitively routine occupations but not manually routine or non-routine low-wage occupations. This suggests that low-wage routine cognitive tasks are susceptible to technological substitution. While the short-run employment consequence of this reshuffling on individual workers is economically small, due to concurrent employment growth in other low-wage jobs, workers previously employed in cognitively routine jobs experience relative wage losses.

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