Who Benefits from Productivity Growth? Direct and Indirect Effects of Local TFP Growth on Wages, Rents, and Inequality

82 Pages Posted: 31 May 2018

See all articles by Richard Hornbeck

Richard Hornbeck

University of Chicago - Booth School of Business

Enrico Moretti

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2018

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.

Suggested Citation

Hornbeck, Richard and Moretti, Enrico, Who Benefits from Productivity Growth? Direct and Indirect Effects of Local TFP Growth on Wages, Rents, and Inequality (May 2018). CEPR Discussion Paper No. DP12953, Available at SSRN: https://ssrn.com/abstract=3186514

Richard Hornbeck (Contact Author)

University of Chicago - Booth School of Business ( email )

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Enrico Moretti

University of California, Berkeley - Department of Economics ( email )

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Berkeley, CA 94720-3880
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HOME PAGE: http://emlab.berkeley.edu/~moretti/

National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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