Are the Most Productive Regions Necessarily the Most Successful? Local Effects of Productivity Growth on Employment and Earnings

Abstract

Economists typically celebrate productivity growth as the chief way to improve living standards. They also advocate that particular cities and regions strive to be as productive as possible to attract business and increase employment. However, while productivity growth may reduce costs, improve quality, or lead to innovation and new products, if demand is insufficiently elastic, labor demand may decrease, reducing employment in that location. In other words, places experiencing the most productivity growth may face some unintended consequences, such as weakening of local labor markets. In this paper, we study county-level effects of productivity growth and productivity levels in the computer and electronic product manufacturing industry (NAICS334), the goods sector (excluding NAICS334) and in the services sector on total employment growth, employment growth in major sectors, income and earnings growth. The results suggest that productivity growth generally suppresses job growth but has boosting effects on earnings and, to a lesser degree, on per-capita income, although there is considerable variation across geographies and specific outcomes