The IT Revolution at the City Level: Testing a Model of Endogenous Biased Technology Adoption

1 — Abstract — This paper examines the process of technology adoption and its interaction with local labor market conditions. In particular, we examine cross-city differences in PC-adoption, relative wages, and changes in relative wages over the period 1980-2000 to evaluate whether the patterns conform to the predictions of a neo-classical model of technology choice. Our approach melds the literature on the effect of the relative supply of skilled labor on technology adoption to the often distinct literature on how technology may influence the relative demand for skilled labor. Our results support the idea that differences in technology use across cities and its effects on wages reflect an equilibrium response to local factor supply conditions. More specifically, our model and data suggest that cities initially endowed with relatively abundant and cheap skilled labor adopted PCs more aggressively than cities with relatively expensive skilled labor. Further, relative wages increased the most in cities that adopted PCs most intensively, leading the downward sloping relationship between relative wages and the supply of skilled labor that existed in 1970, 1980, and 1990 to lessen considerably by 2000. These findings contribute to the literature on changes in the returns to education by clarifying how to evaluate the role of technological change on wage changes when technology adoption is endogenous.