The Economic Consequences of IT: The IT Revolution’s Meager Benefits and Major Schisms

The IT revolution, underway since around 1980, has featured mediocre growth and rising geographic, educational, and generational inequality. This stands in stark contrast to the broad prosperity and convergence experienced in the 1950s and 1960s. We attribute this change to a swivel in the leading edge of productivity growth away from manufacturing largely present in towns to information technology mainly housed in “superstar” cities. Using a spatial model, we show how this can explain: rising prosperity and rapid housing inflation in “superstar” cities; falling relative wages in towns and the countryside; mediocre aggregate productivity due to increasing misallocation of labor; the loss of manufacturing jobs, especially in cities; and falling migration.

*This paper was presented at a research workshop organised by the Centre for the Study of Governance & Society