Who Benefits From Productivity Growth? The Local and Aggregate Impacts of Local TFP Shocks on Wages, Rents, and Inequality

We estimate who benefits from local productivity growth. We begin by using confidential plant-level data to calculate changes in manufacturing productivity by United States metropolitan areas (MSAs), and then predict changes in MSA productivity based on MSAs’ initial industry shares and subsequent national changes in productivity by industry. We find that local productivity growth benefits local landowners more than local workers, in percentage terms. Workers do benefit directly from local productivity growth, however, as there are generally positive net effects on real earnings. These local effects of TFP are different for skilled and unskilled workers: consistent with lower geographic mobility among less-educated workers, we estimate that TFP growth generates greater increases in the local number of more-educated workers and larger local wage increases for less-educated workers. Thus, local increases in TFP compress inequality at the local level (and local declines in TFP magnify inequality). Geographic mobility induces general equilibrium effects from local changes in TFP, however, and so we then turn to the aggregate impacts of local changes in TFP. We find that a substantial portion (almost half) of the aggregate wage impacts accrue in cities indirectly affected through out-migration, particularly among more-mobile high-skill workers. By contrast, there is little aggregate impact on housing costs, as increases in cities directly impacted by TFP gains are mostly offset by losses in other cities. Thus, the aggregate economic incidence of local productivity shocks falls entirely on workers. Overall, the aggregate economic incidence of local productivity growth differs importantly from the local incidence, and in a manner more skewed toward more-mobile high-skill workers. ∗For helpful comments and suggestions, we thank Chang-Tai Hsieh, Patrick Kline, and Martin Rotemberg. Joseph Root provided excellent research assistance, in addition to assistance from Georgios Angelis, Melissa Eccleston, Alonso Sanchez, and Alex Weckenman. Economists have long considered productivity growth as a key determinant of economic progress and improvements in consumption levels. Indeed, in the long-run, increases in workers’ living standards are naturally linked to productivity growth. Given the central role that productivity growth plays in economic development, it is not surprising that understanding its causes and effects has been central to modern economics. When thinking about how productivity might affect worker welfare, however, there are at least two limitations with the existing literature. First, Total Factor Productivity (TFP) is difficult to quantify empirically and is often imputed using aggregate data. Second, and more fundamentally, most research on the effects of productivity growth is at the country level. This is probably not surprising, as there are huge and well-documented differences in TFP levels across countries and over time (see, e.g., Hall and Jones, 1999; Caseli, 1999). Thinking about productivity as geographically uniform within a country is unrealistic, however, as there are tremendous productivity differences within countries in the cross-section and in changes over time. These differences reflect geographical heterogeneity across cities and regions in industry mix, local transportation infrastructure, R&D investment within industries, local economic policies, human capital spillovers, productivity spillovers, and many other local factors that influence local productivity beyond national trends. Geographical variation in productivity levels and productivity shocks has important implications for the impacts of productivity on worker welfare. Localized productivity shocks might induce migration and, therefore, changes in housing costs (or other local goods) that profoundly alter the welfare consequences of productivity growth. For example, while New York and San Francisco have experienced rapid productivity growth over the past three decades, the cost of living has also increased substantially and has shifted some of the benefits of productivity growth from labor to incumbent landowners. While much recent attention has focused on changes over time in the share of output that accrues to labor and capital, we know less about the incidence of productivity shocks once local prices are taken into account. Arguably, this has the potential to be much more consequential for the distribution of benefits generated by economic growth. In addition, geographical mobility is different across skill groups, with high-skilled workers often more likely to move in response In the United States, for example, we estimate that manufacturing establishments in cities with high average productivity have TFP levels that are more than 50% higher than manufacturing establishments with the same capital stock and same employment in cities with low average productivity. Between 1980 and 1990, TFP increased by 18% in the average US city. This average increase masks profoundly different experiences across cities, with some cities enjoying TFP gains of 50% or more, and other cities experiencing stagnant or even declining TFP. See, for example, work by Blanchard (1997); Blanchard and Giavazzi (2003); Bentolila and Saint-Paul (2003); Jones (2005); Rodriguez and Jayadev (2010); Piketty (2014). A parallel question, which we do not address in this paper, is how much productivity increases benefit consumers as compared to capital owners.