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The Geography of Business Dynamism and Skill Biased Technical Change

This paper seeks to explain several key components of the growing regional disparities in the U.S. since 1980: big cities saw a larger increase in the relative wages and relative supply of skilled workers, and a smaller decline in business dynamism. These trends can be explained by differences across cities in the extent to which firms adopt new skill-biased technologies. With the introduction of a new skill-biased, high fixed cost but low marginal cost technology, firms endogenously adopt more in big cities, cities that offer abundant amenities for high-skilled workers and cities that are more productive in using high-skilled labor. Differences in technology adoption account for the regional divergence in the relative wages and supply of skilled workers and in business dynamism. I document that firms in big cities invest more intensively in Information and Communication Technology, consistent with patterns of technology adoption in the model.

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https://doi.org/10.20955/wp.2020.020