THE INTERNET AND LOCAL WAGES: CONVERGENCE OR DIVERGENCE?

May 6, 2009

What is the relationship between business use of advanced Internet technology and regional variation in U.S. wage growth between 1995 and 2000?  According to researchers with the National Bureau of Economic Research (NBER), business use of advanced Internet technology is associated with wage growth, but they find no evidence that the Internet contributed to regional wage convergence.

Their most interesting finding suggests that the Internet instead caused a divergence of wages:

  • Wage growth and advanced Internet use were more strongly correlated in counties that already were doing well on a variety of measures.
  • In particular, advanced Internet use was especially correlated with wage growth in the 180 counties that, as of 1990, had a population over 100,000 and were in the top quartile in income, education, and fraction of firms in IT-intensive industries.

Overall:

  • While the Internet explains just 1 percent of the wage growth in the average county in their sample, it explains 25 percent of the difference in wage growth between the 180 counties that were already doing well and all other counties.
  • The authors also find little evidence that use of advanced Internet technologies was associated with growth in either employment or establishments.

Because these results suggest a considerable divide in the benefits of advanced Internet use across urban and rural areas, the researchers feel that the debate about the economic impact of IT must focus on regional variation.  Efforts to subsidize rural Internet development would have little impact, they claim, because there is little evidence that the Internet has much impact in rural areas.  This runs counter to the motivation for a wide array of policies encouraging Internet business use outside of urban areas, including policies to subsidize rural broadband development.

Source: Lester Picker, "The Internet, Wages and Consumer Welfare," NBER Digest, April 2009; based upon: Chris Forman, Avi Goldfarb and Shane Greenstein, "The Internet and Local Wages: Convergence or Divergence?" National Bureau of Economic Research, Working Paper, No. 14750, February 2009.

For text:

http://papers.nber.org/papers/w14750

 

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