Urban-Biased Structural Change

Using French micro-data, we show that rapid structural transformation in densely populated cities is driven by the expansion of large tradable services firms and the departure of large manufacturing firms. This reallocation is accompanied by sharply rising house prices but without a compensating increase in urban nominal wages. Using a quantitative spatial equilibrium model, we highlight the role that local consumption services play in reconciling these facts. We show that structural change leads to an expansion of local services varieties, which improves amenities and moderates urban wage growth despite rising house prices. By containing labor costs, this mechanism allows large, urban-centered tradable services firms to capitalize on their fast productivity growth. As a result, the forces underlying urban-biased structural change have facilitated the rise of superstar services firms and have increased the urban-rural welfare gap, even though conventional statistics point in the opposite direction.