Skilled Scalable ServicesThe New Urban Bias in Recent Economic Growth

Fabian Eckert Sharat GanapatiUCSD Georgetown

Conor WalshPrinceton

DISCLAIMER:“Any opinions and conclusions expressed herein are those of the author and do notnecessarily represent the views of the U.S. Census Bureau. All results have been

reviewed to ensure that no confidential information is disclosed.”

Growth in the Service Economy

• Wage gaps between rich+poor U.S. cities tended to close historically

• Recent research: this stopped around 1980

• New Urban Bias in recent economic growth:7→ The largest cities saw persistently faster wage growth

• Today:I. Skilled Scalable Services mechanically account for New Urban BiasII. Tech price declines + scale advantages in cities offer unified explanation

The New Urban Bias in Recent Economic Growth

1980

2015

1

1.2

1.4

1.6

1.8

2

2.2

1 2 3 4 5 6 7 8 9 10

Rela

tive t

o D

ecile

1

Ave

rage W

age

Commuting Zone Population Density

What Are Skilled Scalable Services?

• Skill-intensive industries that create and communicate information

7→ ICT allows these industries to increase scale

• For each 2-Digit NAICS service industry compute:

7→ Skill Intensity: Share of college workers in workforce

7→ ICT Intensity: Share of software+hardware in total capital

• Skilled Scalable Services: highest ranking in both measures, today and back in 1980

Skilled Scalable Services 7→ SSS

Information

Finance, Insurance

Management of Companies

Professional Services

Health Care

Education

Arts, Recreation

Admin, Support

Wholesale Trade

Transportation, Warehousing

Retail

Accommodation, Food

Other Services

Real Estate

123456789

1011121314

Skill

Inte

nsity

Ran

k

1234567891011121314ICT Intensity Rank

New Urban Bias

1980

2015

1

1.2

1.4

1.6

1.8

2

2.2

1 2 3 4 5 6 7 8 9 10

Rela

tive t

o D

ecile

1

Ave

rage W

age

Commuting Zone Population Density

Skilled Scalable Services and the New Urban Bias

19802015

1980

2015

1

1.2

1.4

1.6

1.8

2

2.2

1 2 3 4 5 6 7 8 9 10

SSS

Non-SSS

Rela

tive t

o D

ecile

1

Ave

rage W

age

Commuting Zone Population Density

Fact: Rapid Wage Growth in SSS

1

1.2

1.4

1.6

1.8

2.0

1980 1990 2000 2010 2020

Skilled Scalable ServicesEducation + MedicalTrade + TransportArts + HospitalityOther ServicesResources + ConstructionManufacturing

Relat

ive to

198

0Av

erag

e W

age

Fact: Urban-Biased Wage Growth in SSS

.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1 2 3 4 5 6 7 8 9 10

Skilled Scalable ServicesEducation + MedicalTrade + TransportArts + HospitalityOther ServicesResources + ConstructionManufacturing

Relat

ive to

Dec

ile 1

Wag

e G

row

th, 1

980-

2015

Commuting Zone Population Density

Fact: Rapid ICT Capital Adoption in SSS

0

.1

.2

.3

1980 1990 2000 2010 2020

Skilled Scalable ServicesEducation + MedicalTrade + TransportArts + HospitalityOther ServicesResources + ConstructionManufacturing

Softw

are

& Ha

rdw

are

(% o

f 201

2 $)

Tech

nolo

gy S

hare

of C

apita

l

Explaining the New Urban Bias

• Part I: Statistically, all of the urban bias is accounted for by SSS

• Part II: Structurally, what explains the urban bias of SSS growth?

• Starting Point: Successful literature on skill bias in recent growth

7→ Shock: Falling non-residential equipment prices

7→ Mechanism with two ingredients:◦ Skilled Labor/Capital complementarity◦ Skilled/Unskilled Labor substitutability

Can this Price Decline also Explain the New Urban Bias?

Model Input: Information Processing Equipment Prices

0

.2

.4

.6

.8

1

1980 1990 2000 2010 2020

Information ProcessingNon-residential EquipmentIndustrial EquipmentOther EquipmentTransportation Equipment

Rel

ativ

e to

CP

IP

rice

Inde

x

Result: SSS Wage Premium in Model and Data

Slope: 0.062

-.6

-.4

-.2

0

.2

.4

.1 1 10 100 1000 10000

19

80

-20

15

Rela

tive t

o M

ean C

ZD

iffere

ntia

l SS

S W

age G

row

th

1980 Population Density (pop/sqmi)

(A) Data

Slope: 0.081

-.6

-.4

-.2

0

.2

.4

.1 1 10 100 1000 10000

19

80

-20

15

Rela

tive t

o M

ean C

ZD

iffere

ntia

l SS

S W

age G

row

th

1980 Population Density (pop/sqmi)

(B) Model

Conclusion: The End of Shared Prosperity?

• The era of manufacturing was one of widely shared growth

7→ Across different education groups and regions

• SSS-led economic growth appears fundamentally different

7→ ”Superstar” regions+workers see rapid wage growth

• Flipside: Smaller places+less skilled workers may not benefit