Accounting for the role of occupational change on earnings in Europe and Central Asia

This paper analyzes the process of occupational changes in seven countries from Europe, the former Soviet bloc and Turkey (Georgia, Germany, Kyrgyz Republic, Poland, Russia, Spain and Turkey) using harmonized household surveys in the last twenty years. As for the existing literature, this paper starts by providing an assessment of labor market polarization across these economies. It broadly confirms results from earlier studies: occupations polarization is clearer and stronger for richer, Western European countries, than for the emerging Eastern economies. The paper main original contribution, however, is to link the occupational shifts to the changes in the earnings distribution. Not having a panel data which would allow to ‘follow’ individuals before and after the occupational shock, the paper has to rely on decomposition techniques based on micro-simulated counterfactuals (Bourguignon and Ferreira, 2005, and Inchauste et al., 2014). Using cross-sectional surveys, the method estimates models of occupational outcomes and wages for an initial and final (before and after) period. Results of our analysis show that changes in rewards linking individual characteristics to occupational choices explain growth in nonroutine, manual task intensive jobs in EU countries. This change appears to hurt particularly those with less than higher education, whose probability of working in routine task intensive occupations decrease and end up being up displaced to the growing but lower paid non-routine, manual task intensive occupations. In former Soviet countries and Turkey, changes in rewards linking characteristics to occupational choices explain the growth in routine task intensive jobs, which affects relatively more women and the high skilled, who end up working in occupations for which they are over-skilled. Changes in individuals’ characteristics -notably the increase in education levelsaccount for the growth in nonroutine, cognitive task intensive occupations across the whole region and have a somewhat progressive impact overall. Changes in wage returns to individuals’ characteristics are roughly similar across the sample countries and imply a decrease in wage returns to higher education in routine, task intensive occupations and an increase of those same returns in non-routine, cognitive task intensive occupations. However, their distributional impact is different: they hurt the bottom deciles in part of the EU countries and the top deciles in former Soviet countries and Turkey. This heterogeneous pattern results from differences in the distribution of skills across the earning distribution between the EU and former Soviet countries and Turkey. Our results illustrate the complex reality of occupational change across Europe and Central Asia: whilst the patterns of EU countries show that routine task intensive occupations and the bottom deciles of the earnings distribution are particularly affected, in the Eastern part of the region the reverse is true – the top deciles of the distribution are negatively impacted by occupational change, which affects relatively more non-routine, cognitive task intensive occupations.