How Local Productivity Growth Affects Workers Near and Far

Using total factor productivity (TFP) as a measure of local productivity growth, Hornbeck and Moretti analyzed two decades of data from major US cities to quantify the direct effects on people living in booming cities and the indirect effects on people elsewhere. Allowing for trade-offs between salary and cost-of-living increases, as well as unequal distribution of benefits across different groups, the researchers find that low-skilled workers gained the most from local productivity growth.

But gains extended further afield: a boom in San Diego or Los Angeles, say, was also felt in other cities. And high-skilled workers gained more from productivity growth in other cities.

The data Hornbeck and Moretti analyzed, spanning 1980 to 2000, focused on cities that experienced higher productivity growth because of a concentration of rapidly innovating industries, compared with cities that had a concentration in industries with less growth.

“Our main result is that local productivity growth does seem to be delivering sizeable and similar gains to higher- and lower-skilled workers, of roughly 0.5 to 0.6 percent year-over-year,” Hornbeck says. “Locally, in the cities experiencing major growth, some of these benefits are lost to increases in the cost of living as people crowd in from elsewhere. But across the nation, increases in living costs in particular cities are counterbalanced by decreases in housing costs in other places.”

Locally, lower-skilled workers benefited more

When a city started booming, there was a greater impact on nominal earnings and purchasing power for high-school graduates than for college graduates, which suggests that local productivity growth acted to compress local income inequality.