The internet didn't eliminate distance

By R.A. | WASHINGTON

MARK THOMA sends us to a very interesting paper by Avi Goldfarb, Chris Forman, and Shane Greenstein called "The internet and local wages: a puzzle". Here's the abstract:

How did the diffusion of the internet affect regional wage inequality? We examine the relationship between business investment in advanced internet technology and local variation in US wage growth between 1995 and 2000. We identify a puzzle. The internet is widespread, but the economic payoffs are not. Advanced internet technology is only associated with substantial wage growth in the 6% of counties that were already highly wealthy, educated, and populated and had IT-intensive industry. Advanced internet and wage growth appear unrelated elsewhere. Overall, advanced internet explains over half the difference in wage growth between already well-off counties and all others.

Look at that last line again: advanced internet may explain over half the difference in wage growth between well-off counties and others. What mechanism do the authors envision?

Greenstein believes the reason was that these areas already had sophisticated companies and the communications infrastructure needed to seize on the Internet's opportunities. But there are other possibilities. The impact could have been due to a well-known phenomenon called “biased technical change,” which means that new technologies can thrive only in places with skilled workers who know how to use them. Or it could have been because cities brought certain advantages—denser labor markets, better communication, tougher competition—than more remote areas.

“Each one of those explanations is plausible in our data, and probably explains a piece of it. But none of them by themselves can explain the whole story,” Greenstein says. “It's really a puzzle.”

I suspect there are multiple causal paths. Internet technologies increase the return to certain sets of skills, and they increase the return to agglomeration, and there are no doubt interactions between the two factors. And it's often been the case that clusters of skilled workers are effective at experimenting with new technologies in order to come up with profitable ways to deploy them. Nathan Rosenberg describes how new manufacturing techniques were developed and diffused by developers of machine tools in New England, and in his new book Ed Glaeser talks about Detroit in the early days of the automobile, when seemingly every block was home to a carmaker experimenting with new designs and production techniques. It would not be surprising if experimentation with new internet applications and organisational forms was similarly concentrated.

Of course, past performance is not indicative of future results. Just because the wage returns to the internet were highly concentrated in the past does not mean that they'll also be concentrated in the future. But this research is an interesting contribution to the discussion about technology, growth, and inequality.