The Geography of Structural Transformation: Effects on Inequality and Mobility

About this event

Economies transform at an uneven pace: San Jose's meteoric rise coexists with Detroit's slow decline. This paper develops a dynamic overlapping generations model of economic geography to explain variation in structural transformation across space and time. In the model, historical exposure to different industries creates persistence in occupational structure, and non-homothetic preferences and differential productivity growth lead to different rates of structural transformation. Despite the heterogeneity across locations, sectors, and time, the model remains tractable and is calibrated to match metropolitan area data for the U.S. economy from 1980 to 2010. The calibration allows us to back out measures of upward mobility and inequality, thereby providing theoretical underpinnings to the Gatsby Curve. The counterfactual analysis shows that structural transformation has substantial effects on mobility: if there were no productivity growth in the service sector, income mobility would be 6 percent higher, and if amenities were equalized across locations, it would rise by 10 percent.