Working Paper: CEPR ID: DP12953
Authors: Richard Hornbeck; Enrico Moretti
Abstract: We estimate the local and aggregate effects of total factor productivity growth on US workers' earnings, housing costs, and purchasing power. Drawing on four alternative instrumental variables, we consistently find that when a city experiences productivity gains in manufacturing, there are substantial local increases in employment and average earnings. For renters, increased earnings are largely offset by increased cost of living; for homeowners, the benefits are substantial. Strikingly, local productivity growth reduces local inequality, as it raises earnings of local less-skilled workers more than the earnings of local more-skilled workers. This is due, in part, to lower geographic mobility of less-skilled workers.However, local productivity growth also has important general equilibrium effects through worker mobility. We estimate that 38% of the overall increase in workers' purchasing power occurs outside cities directly affected by local TFP growth. The indirect effects on worker earnings are substantially greater for more-skilled workers, due to greater geographic mobility of more-skilled workers, which increases inequality in other cities. Neglecting these general equilibrium effects would both understate the overall magnitude of benefits from productivity growth and misstate their distributional consequences.Overall, US workers benefit substantially from productivity growth. Summing direct and indirect effects, we find that TFP growth from 1980 to 1990 increased purchasing power for the average US worker by 0.5-0.6% per year from 1980 to 2000. These gains do not depend on a worker's education; rather, the benefits from productivity growth mainly depend on where workers live.
Keywords: Productivity Growth; Wages; Inequality; Housing Costs
JEL Codes: J31; R11; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Local TFP growth (F16) | Annual earnings for local workers (J31) |
| Local TFP growth (F16) | Local employment (J68) |
| Local TFP growth (F16) | Housing rents (R21) |
| Local TFP growth (F16) | Local inequality (D31) |
| Local TFP growth (F16) | Purchasing power outside affected cities (F69) |
| Local TFP growth (F16) | Earnings of less-skilled workers (J31) |
| Local TFP growth (F16) | Earnings of more-skilled workers (J31) |