The driving forces of service localization during the twentieth century: evidence from the United States

Despite the expanding role of services in the global economy, economic history has paid little attention to their geographic localization. This paper provides a description of the increasing specialization and localization patterns of services across US counties compared to other sectors from 1930 to 2010. It stresses that market potential influences most of these changes. I use census employment data by sector to re-examine the debate of comparative advantage vs. economic geography on county location coefficients for services. The interaction between county and industry characteristics shows that the geography of services has been influenced by market potential since 1980. OLS and 2SLS results suggest a cumulative effect of increasing returns to scale that enhanced the agglomeration of services through linkages with other services and manufacturing firms. This provides a complementary view on the transformation of the Manufacturing Belt as the cradle of the service economy.