Digital dividends and urban frictions: The spatial reallocation of heterogeneous labor

With the rapid expansion of ICT capital, labor markets are undergoing profound transformations. This paper investigates whether ICT shocks can increase labor supply and mobility and improve the spatial allocation of skills. It further examines how the interaction between these shocks and institutional barriers generates spatial heterogeneity that affects growth and welfare. To address these questions, we develop a quantitative spatial equilibrium model featuring nested ICT capital and heterogeneous labor. The model incorporates urban frictions, including residential registration, housing regulations, and city amenities, to theoretically trace how ICT shocks drive labor reallocation and skill structure evolution. We calibrate the model and conduct numerical simulations, applying uniform digital shocks across cities to identify heterogeneous responses in labor supply elasticity and the moderating role of urban characteristics. We empirically test the model’s key predictions using long-difference models based on microdata from the 2005 and 2015 national population surveys. The analysis is further supplemented by multi-source economic and geographic data. Our findings show that ICT expansion significantly promotes labor inflows, but effects vary across skill groups and city types. Institutional barriers such as household registration and housing regulations strongly constrain the mobility of low-skilled workers, while high-skilled labor is less affected. The higher responsiveness of low-skilled labor to ICT shocks is offset by institutional frictions. We find no evidence that ICT expansion substantially enhances mobility of skilled workers within innovation-intensive manufacturing, highlighting limited integration between digitalization and high-end industries. Furthermore, removing a single urban barrier is insufficient to simultaneously improve worker welfare, optimize labor allocation, and promote growth.