Structural Transformation and Labor Market Polarization : The Role of Productivity and Taxation.

Summary This article aims at deepening our understanding on three facts in labor economics: structural transformation, labor market polarization and the deterioration of European labor market outcomes. The originality of our approach is that we extend the literature by focusing on the role played by productivity and taxation on low skilled services hours of work between 1970 and 2007 in Europe and the U.S. Indeed, this sector produces services that can be highly substitutable with home produced goods. One might expect that taxation has a significant effect on hours worked in this sector. We allowed for ICT diffusion which is equivalent to productivity growth. We also introduced distortionary taxation on labor income and a home production sector which is not subject to taxation. Our model seems to replicate some qualitative facts as the evolution of hours worked, relative price, wage polarization, and quantitative facts as sectoral shares of hours worked mostly for Europe suggesting that productivity and taxation are indeed key variables.