Quality of Communications Infrastructure, Local Structural Transformation, and Inequality

We document that improvements in the quality of communication infrastructure have a causal impact in employment growth, wage inequality, and sectoral economic activity in US counties. Our treatment is the quality of communication infrastructure in a county measured by the av erage Internet speeds offered by telecommunication companies. For identification, we use as instrumental variable the structure of ARPANET (the precursor of Internet), a network funded by the Department of Defense, whose information we retrieved from historical government doc uments. We show that faster Internet increases the shares of employment in high skilled services sectors, while negatively affecting activity in services sectors like retail, accommodation and food services. Two mechanisms explain our results: input-output linkages and a rise in high-skilled workers in ICT-intensive occupations. Our results are consistent with the Rybczynski theorem. Lastly, our results suggest that reduction in communication costs induced by better Internet in U.S. counties increases local inequality.