Urban-Biased Structural Change

Using French micro-data, we document that between 1995 and 2018 the rise of tradable services disproportionately favored dense cities, especially through the expansion of large tradable-services firms and the relative decline of large manufacturing firms. These changes were accompanied by sharply rising urban house prices but no compensating increase in urban nominal wages. Using a quantitative spatial equilibrium model, we show that the interaction of firm sorting and endogenous local-service variety can explain these patterns. In the model, tradable-services growth reallocates activity toward dense cities, where large tradable-services firms are more strongly concentrated. The induced expansion of local-service variety then raises urban amenities and moderates nominal wage growth, allowing those firms to expand further despite rising housing costs. As a result, spatial welfare gaps widen even though conventional indicators based on wages and house prices substantially understate the change.