cational achievement before 1995.
Between 1995 and 2000, they showed
a 28% average increase in wages, compared with a 20% increase in other
counties, where the Internet appears
to not have had much impact on economic performance (see the accompanying figure).
In short, the Internet appears to
have exacerbated regional wage inequality, explaining over half the difference in wage growth between the 6%
of counties that were already well-off
and all other counties.
Why did the Internet make such big
waves in these few areas? Three explanations are possible:
˲ Big cities have needed communications infrastructure and are home
to firms capable of making capital investments that allow the Internet to
enhance what such sophisticated firms
are already doing.
˲A phenomenon called “
skill-bi-ased technical change” might be under way, in which new technologies
raise the wages only of skilled workers, while unskilled workers cannot
use the new technology and do not receive the necessary training to benefit
from its deployment through wage
˲ Cities have denser labor markets,
and better communication between
supply and demand. Programmers
with skills in the language of mainframes, such as COBOL, and the language of the Web, such as HMTL and
Perl lived in (or moved to) big cities,
where more firms would be looking
for such workers. Similarly, a range of
other inputs that would make Internet adoption more valuable is more
available in cities.
may allow firms
in rural iowa
to reach new
Wall Street but
it also allows
Wall Street banks
to reach investors
in rural iowa.
in rural Iowa. Our study shows that
benefits from Internet adoption such
as increased wages are, on balance,
more likely to show up in New York
City than in rural Iowa. The predicted
“leveling” effects of the Internet have
not materialized, and it is doubtful
that short-run investment in Internet
infrastructure (such as extending access to broadband) will generate immediate economic benefits for areas
that have otherwise low capital investment, inadequate labor skills, and
Each explanation is plausible, and
probably explains a piece of the story.
However, existing data does not allow
us to distinguish between the explanations, and so the payoff puzzle remains.
The Internet has been widely diffused
and used: in this, our results echo the
popular optimism. Also, the benefits
are not limited to the locations that
dominate supply of equipment and
software, such as Boston, Seattle, New
York, and Silicon Valley.
However, in contradiction to popular optimism, our data does not show
any evidence of improvement in the
comparative economic performance
of isolated locations or less dense locations. The Internet may allow firms
in rural Iowa to reach new customers on Wall Street but it also allows
Wall Street banks to reach investors
These results have important implications for public policy. Many lawmakers have argued for government to
subsidize the expansion of the Internet into poor and isolated regions. For
example, the 2009 economic stimulus package allocated over $7 billion
for broadband expansion in under-served areas, under the assumption
that creating such infrastructure will
raise wages and income. Our results
suggest such Internet infrastructure
investments by themselves are unlikely to raise wages in poor and isolated regions, at least in the short run.
Such investments might be justified
to strengthen education, increase
civic engagement, or promote health
and safety. And, over 20 to 30 years
expanding Internet access might lead
to more widespread economic gains.
However, there is little evidence to
suggest a short-term payoff in the
form of increased local wages.
Advanced internet investment and wage growth by county type.
top county in income, education, population, and It-intensity in 1990 other counties
Wage growth 1995 to 2000
1. Cairncross, f. The Death of Distance. harvard
university press, Cambridge, ma, 1997.
2. forman, C., goldfarb, a., and greenstein, s. how did
location affect adoption of the commercial Internet?
global village vs. urban leadership. Journal of Urban
Economics 58, 3 (mar. 2005), 389–420.
3. forman, C., goldfarb, a., and greenstein, s. the
Internet and local wages: a puzzle. American
Economic Review 102, 1 (jan. 2012), 556–575.
4. friedman, t.l. The World is Flat: A Brief History of the
Twenty-First Century. farrar, straus, and giroux, new
. 1. 2
Fraction of firms with advanced internet
Chris Forman ( firstname.lastname@example.org) is the
robert and stevie schmidt associate professor of It
management in the College of management at georgia
Institute of technology, atlanta, ga.
Avi Goldfarb ( email@example.com) is an
associate professor of marketing at the joseph l. rotman
school of management at the university of toronto.
Shane Greenstein ( firstname.lastname@example.org.
edu) is the kellogg Chair of Information technology
and professor in the kellogg school of management at
northwestern university, evanston, Il.