One of the authors is the senior research economist at the Cleveland Fed and it is thanks to the bank's Twitter feed that we see the story.
From VoxEU, October 16:
The adoption of information technology can cause polarisation in the labour market via the displacement of routine cognitive jobs. This column uses data on over 200,000 firms in the US from 1990 to 2015 to show that the labour savings from IT are largest in big cities and metropolitan areas, where wages are higher, so urban firms have the biggest incentives to invest in these technologies. This in turn leads to the polarisation of occupations across geography and accounts for the rise in wage inequality within cities.
Mobile dating apps work better in dense urban areas. The same goes for information technology (IT), and this has profound implications for inequality and polarisation in the labour market. Polarisation has a marked geographical dimension (Autor 2019, Autor and Dorn 2013, Rossi-Hansberg et al. 2019), yet little is known about the mechanism that links investment in IT and job displacement across space. Much of the benefit of investment by firms in hardware and software comes from labour savings that these technologies bring (e.g. Atalay et al. 2020). This column discusses new evidence that those labour savings are largest in dense, urban areas – basically big cities and metropolitan areas – and therefore, urban firms have the biggest incentives to invest in those labour-saving technologies.
There are two reasons why firms in big cities invest more in labour-saving IT. It is a tale of two prices: the wage cost of labour and the price of IT. Wages are systematically higher in bigger cities. This is known as the urban-wage premium, which in the US has an elasticity of around 4.5%. As the size of a city doubles, wages increase by 4.5%. That implies that average wages in New York, NY are about 35% higher than in Janesville, WI, simply because New York with a population of 20 million is 125 times larger than Janesville with a population of 163,000. The urban wage premium is the response of the wage to higher housing costs in big cities. And big cities are more expensive because they are more productive. All else equal, if wages were the same, workers would prefer to live in the cheaper small cities.
Instead, the price of IT is very similar everywhere, in New York and in Janesville. These IT technologies are nearly perfectly tradable, where software is increasingly installed online, hardware is shipped by courier, and technical support is done remotely. As a result, the price of IT as a tradable good is independent of the location of the firm.
So with the cost of comparable labour higher in big cities, and the cost of IT technologies the same, firms invest disproportionately in IT in big cities. Now the adoption of new technologies varies by the type of job, in particular, whether they are routine occupations. This affects the composition of skills (job polarisation) within and between cities, and it has implications for wage inequality (wage polarisation).
This economic mechanism driven by price differences is exactly what we corroborate in the data. In a new paper (Eeckhout et al. 2021), we use a novel dataset, the Ci Technology Database from the Aberdeen Group, with detailed hardware and software information for over 200,000 establishments to test this hypothesis and how polarisation has evolved since 1990. Using information on the total IT budget per worker as well as on the expenditure and adoption of Enterprise Resource Planning (ERP) software, we establish two robust stylised facts. First, IT investment is highest in firms located in cities with high housing costs. Figure 1 illustrates that the cities such as New York and San Francisco with the highest rent index spend over 50% more on IT per worker than cities like Janesville and Springfield. We confirm the robustness of this finding with different regression specifications....
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