Occupational reallocation within and across firms: Implications for labor market polarization

Abstract

This study analyzes how labor market frictions interact with firms’ decisions to reallocate workers across different occupations during labor market polarization. We compare the patterns of occupational reallocation within and across firms in the US and Germany in recent years. We find within-firm reallocation contributes significantly to the decline in employment in routine occupations in Germany, but much less so in the US. We construct a general equilibrium model of firm dynamics and find the model with different firing taxes can replicate the difference in firm-level adjustment patterns across these countries. We conduct two counterfactual experiments for each country, highlighting the different roles played by the within-firm cost of reorganizing the occupational mix and across-firm frictions created by firing taxes. The results suggest the latter plays a more significant role in labor market polarization. Higher firing costs would lead to greater and faster polarization in the US.