Working Paper: CEPR ID: DP16540
Authors: Jan Eeckhout; Christoph Hedtrich; Roberto Pinheiro
Abstract: We show that differential IT investment across cities has been a key driver of job and wage polarization since the 1980s. Using a novel data set, we establish two stylized facts: IT investment is highest in firms in large and expensive cities, and the decline in routine cognitive occupations is most prevalent in large and expensive cities. To explain these facts, we propose a model mechanism where the substitution of routine workers by IT leads to higher IT adoption in large cities due to a higher cost of living and higher wages. We estimate the spatial equilibrium model to trace out the effects of IT on the labor market between 1990 and 2015. We find that the fall in IT prices explains 50 percent of the rising wage gap between routine and non-routine cognitive jobs. The decline in IT prices also accounts for 28 percent of the shift in employment away from routine cognitive towards non-routine cognitive jobs. Moreover, our estimates show that the impact of IT is uneven across space. Expensive locations have seen a stronger displacement of routine cognitive jobs and a larger widening of the wage gap between routine and non-routine cognitive jobs.
Keywords: IT investment; job polarization; spatial sorting; urban wage premium
JEL Codes: D21; J24; J31; R23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in IT prices (D49) | Widening wage gap between routine and nonroutine cognitive jobs (J31) |
| Decline in IT prices (D49) | Shift in employment from routine cognitive to nonroutine cognitive jobs (J62) |
| Higher IT investment in large, expensive cities (R42) | Displacement of routine cognitive jobs (J63) |
| Higher IT investment in large, expensive cities (R42) | Decline of routine cognitive occupations (J29) |