The Geography of Business Dynamism and Skill-Biased Technical Change

Hannah Rubinton

No 2020-020, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper shows that the growing disparities between big and small cities in the U.S. since 1980 can be explained by firms endogenously responding to a skill-biased technology shock. With the introduction of a new skill-biased technology that is high fixed cost but low marginal cost, firms endogenously adopt more in big cities, cities that offer abundant amenities for high-skilled workers, and cities that are more productive in using high-skilled labor. In cities with more adoption, small and unproductive firms are more likely to exit the market, increasing the equilibrium rate of turnover or business dynamism---a selection effect similar to Melitz (2003). Differences in technology adoption and selection account for three key components of the growing regional disparities, known as the Great Divergence: (1) big cities saw a larger increase in the relative wages and supply of skilled workers, (2) big cities saw a smaller decline in business dynamism, and (3) firms in big cities invest more intensively in Information and Communication Technology (ICT).

Keywords: skill biased technical change; technology adoption; economic geography (search for similar items in EconPapers)
JEL-codes: O33 R12 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2020-07-21, Revised 2024-09-13
New Economics Papers: this item is included in nep-geo, nep-ict, nep-sbm, nep-tid and nep-ure
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Citations: View citations in EconPapers (3)

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DOI: 10.20955/wp.2020.020

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