IT and urban polarization

We show that differential IT investment across cities has been a key driver of job and wage polarization since the 1990s. Using a novel data set, we establish two stylized facts: IT investment is highest in firms in large and expensive cities, and the decline in routine cognitive occupations is most prevalent in large and expensive cities. To explain these facts, we propose a model mechanism where the substitution of routine workers by IT leads to higher IT adoption in large cities due to a higher cost of living and higher wages. We estimate the spatial equilibrium model to trace out the effects of IT on the labor market between 1990 and 2015. The decline in IT prices alone accounts for about 30 percent of the stronger displacement of routine cognitive jobs in expensive locations.