Who benefits most from productivity growth?

Credit: Associated Press

Áine Doris | Dec 26, 2018

Sections Economics

When big cities experience an economic boom, you expect an upsurge in wages and growth in those areas. But there’s some nuance: according to Chicago Booth’s Richard Hornbeck and University of California at Berkeley’s Enrico Moretti, one area’s surge particularly benefits low-skilled workers locally—and high-skilled workers elsewhere. 

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. 

When a city started booming, the researchers find, 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.

This reflects geographic mobility. Highly skilled workers were more likely to move than blue-collar workers. A 1 percent increase in local TFP led to a roughly 6 percent long-term increase in college-graduate workers in a city, compared with a 3 percent increase in the number of high-school-graduate workers, Hornbeck and Moretti find.

While college graduates had the transferable skills to pursue opportunities wherever they opened up, these opportunities didn’t always translate into large increases in salary adjusted for cost of living. For lower-skilled workers on booming production lines, however, there tended to be a bigger increase in take-home benefits because there were relatively fewer of them competing for more jobs.

Worker mobility also had spillover effects on cities that lost skilled workers to boomtowns, the researchers find. Wages for highly skilled workers increased in the nonboom cities as such workers were drawn away and became scarcer. Further, in the cities that people were leaving, the cost of living declined. For renters, this was good news, as it translated to lower costs, although homeowners were hurt as property values fell. 

For cities such as San Francisco, the opposite was true. As in-migration increased, so did demand for housing. Renters were hardest hit as prices surged—a 1 percent increase in city-level TFP translated into a 1.5 percent increase in rents, the research finds. Homeowners in these in-migration cities were better off, with the same 1 percent uptick in TFP resulting in higher home values. 

“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.”

The overall cost of living in the United States is not being driven up by productivity growth, the researchers argue. 

“Local productivity growth, which draws workers to some particular cities, is just making it more expensive to live in those cities relative to other places,” Hornbeck says. “This means that, in the aggregate, homeowners across the US are not capturing a substantial portion of the gains from productivity growth. Workers are capturing the benefits in the form of higher real wages adjusted for changes in the cost of living. Many of the benefits of local productivity growth are felt in other places, as workers move across locations.”