Cross-Occupation Externalities and Local Industrial Policy

We estimate within city productive spillovers in the U.S. and study their implications for location-based industrial policies. Spillovers arise from the interaction of workers, but the degree of externalities across industries depends on their occupational makeup. Using a structural model of trade across cities, combined with data on output, employment, wages and prices varying across cities, sectors, and occupations, we obtain estimates of both city-specific and sector-specific productivity across 33 sectors and 381 U.S. cities. Moreover, using information on regional price parities, we also obtain estimates of transport costs and trade elasticities for sectors where bilateral trade data is lacking. The extensive set of disaggregated productivities that we construct then allows us, by way of an instrumental variable approach that accounts for the endogenous location decisions of workers, to estimate the extent of productivity spillovers across occupations. Given our estimates of within city productive spillovers and the framework we develop, we study the effectiveness of policies promoting particular industries or occupations within different U.S. cities. In doing so, we assess how the distribution of industries and workers in space influences national output, local development, and the distribution of wages across occupations.