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 gains.

˲ 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.

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
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 market conditions.

 

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.

Policy

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

Conclusion

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

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References

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 york, 2005.

 

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Fraction of firms with advanced internet

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Chris Forman ( [e-mail]) 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 ( [e-mail]) is an associate professor of marketing at the joseph l. rotman school of management at the university of toronto. Shane Greenstein ( [e-mail]. edu) is the kellogg Chair of Information technology and professor in the kellogg school of management at northwestern university, evanston, Il.